Before making your next trade and tying up your valuable capital, you’d be wise to consider where the smart money is parking its own investment dollars with the expectation of positive returns.
Insider Monkey keeps track of the stocks that top-rated corporate insiders and a select group of the best performing hedge funds in the world are buying on a daily basis.
Our team has identified the five stocks that insiders and hedge funds are quietly accumulating before the broader market catches on…and none of the usual big name stocks are on the list.
They believe these five stocks are the five best companies for investors to buy now…
At least two different insiders have purchased a noteworthy amount of shares of all five of these stocks in the past three months. All five of them have likewise hit recent multi-year highs in hedge fund ownership.
On their own, these are strong signals that a stock is poised for positive returns in the near future. When combined, they create a powerful indicator that a company is extremely undervalued and is likely to have near-term catalysts that will drive shares closer to their fair value…or beyond.
The strong correlation between insider buying and positive stock returns in both the short- and long-term has been demonstrated in multiple studies dating back to the 1960’s.
In a recent analysis of insider buying at S&P 500 companies between 2010 and 2019, it was found that more than 60% of them outperformed the market over the following 14, 30, 90, 180, and 360 days. 180 days was the sweet spot, with fully two-thirds of those companies beating the market during that timeframe.
That analysis didn’t even factor in additional variables that have been demonstrated to improve the reliability of mimicking insiders’ trades for positive returns. Among them are the importance of focusing on purchases made by leading members of a company’s executive team as opposed to mere board members, as the former have greater access to information and trends within the company and a better idea of where its shares are likely to head.
There’s also the “conviction” of the insider trade to consider. A 2012 study that investigated insider trading in Europe between 2002 and 2009 found that high conviction trades led to excess 12-month returns of just under 21%, while lesser conviction trades weren’t nearly as successful. For that reason, we only included companies which had at least two different insider purchases of more than $50,000 in shares over the past three months.
As far as hedge funds go, a 2019 research report from Barclays and Novus found that a hedge fund mimicking strategy that focuses on their high-conviction and consensus stock picks (precisely what Insider Monkey tracks) beat the S&P 500 by an average of 3.8% between the first quarter of 2004 and the second quarter of 2019. Our research director, Dr. Inan Dogan, has been sharing his stock picks derived from insider trading and hedge fund signals in our monthly newsletter since March 2017. His portfolio of stock picks returned 160% vs. 99% gain for the S&P 500 Index ETF (SPY) over the last 6.5 years. You can subscribe to our monthly newsletter today and get a $100 discount if you follow this link.
The data is clear that either of these methods, when applied properly, is more likely than not to generate positive returns. Now imagine what they can do when combined into one sleek package of insider and hedge fund bullishness.
Below is the list of five stocks that insiders and hedge funds are buying up right now, sorted by overall hedge fund ownership.
Pixabay/Public Domain
5. ARS Pharmaceuticals, Inc. (NASDAQ:SPRY)
Number of Hedge Fund Shareholders: 21
ARS Pharmaceuticals, Inc. (NASDAQ:SPRY) shares took a massive tumble in mid-September, prompting three different insiders of the company to buy shares in the days and weeks afterwards. Two prominent healthcare-focused hedge funds, OrbiMed Advisors and RA Capital Management, bought a combined 7.4 million shares between September 29 and October 21 in five different transactions. Both funds have members on the board of ARS Pharmaceuticals. ARS Chief Legal Officer Alexander Fitzpatrick also purchased 86,258 shares between the 28th and 29th of October.
Hedge fund ownership of ARS Pharmaceuticals, Inc. (NASDAQ:SPRY) dipped slightly in Q2, but remains up by more than 50% since the first quarter of 2022. Steve Cohen’s fund Point72 Asset Management was among the funds that sold off their SPRY stakes during Q2, while Deerfield Management and OrbiMed Advisors were the top shareholders as of June 30.
ARS Pharmaceuticals, Inc. (NASDAQ:SPRY) was hit by an FDA body blow on September 19, when the agency rejected its lead therapy Neffy. The FDA wants the nasal spray to be put through another study testing repeated doses of the treatment, which targets Type 1 allergic reactions, before granting it approval.
That came as a surprise to the company, which said the FDA had informed it just a month earlier that a dosing study could be conducted after the drug was already on the market. The biotech is now aiming to launch Neffy in the second half of next year, pending FDA approval, and insiders clearly remain confident in that eventuality.
4. Xponential Fitness, Inc. (NYSE:XPOF)
Number of Hedge Fund Shareholders: 26
No less than five different insiders of Xponential Fitness, Inc. (NYSE:XPOF) have purchased shares of the company since August 11, the first cases of insider buying at the company in more than two years. Among them were CEO Anthony Geisler and Chief Legal Officer Andrew Hagopian, who purchased 44,900 and 8,800 shares respectively, each in two separate transactions. Board members Jair Clarke, Chelsea Grayson, and Mark Grabowski have also purchased XPOF shares in the past three months.
Xponential Fitness, Inc. (NYSE:XPOF) is steadily rising in popularity among smart money managers, being held by an increasing number of them over each of the last five quarters. Several of the company’s largest shareholders were also adding to their positions in Q2, including Divisadero Street Capital and Millennium Management. Richard Driehaus’ Driehaus Capital owned 2.23 million XPOF shares on June 30, giving it the largest stake among the funds tracked by Insider Monkey.
Fitness club franchisor Xponential Fitness, Inc. (NYSE:XPOF), which releases its third quarter earnings results tomorrow, has grown revenue substantially since hitting the public markets in early 2021. Q2 revenue jumped by 30% year-over-year to $77.3 million, nearly 3x what the company pulled in during Q1 of 2021. The company expects between 540 and 560 new studio openings this year and raised its full-year revenue and EBITDA guidance following its Q2 results.
Shares were hit hard in June of this year following a report from short seller Fuzzy Panda Research which questioned the health of the company’s franchisees and threw shade on CEO Geisler. That report was countered a day later by Evercore ISI analyst Warren Cheng, who classified it as having “little substance” and kept an ‘Outperform’ rating on the stock. Shares rebounded somewhat over the next two months but have trended down even further since then to hit a 52-week low.
The Carillon Eagle Small Cap Growth Fund discussed the positive growth drivers for Xponential Fitness, Inc. (NYSE:XPOF) in the fund’s first quarter 2023 investor letter:
“Xponential Fitness, Inc. (NYSE:XPOF), a global franchisor of boutique fitness brands, performed well, driven by strong quarterly results coupled with upbeat guidance for the coming year. Xponential Fitness continues to grow new boutique fitness units while driving up the use of its existing units.”
3. RB Global, Inc. (NYSE:RBA)
Number of Hedge Fund Shareholders: 29
RB Global, Inc. (NYSE:RBA) shares slumped during the first two weeks of August, sliding by 9.84%. That prompted seven different insiders to snatch up shares between August 8 and September 14. Among the buyers were six members of the company’s board, as well as CEO James Kessler, who purchased 2,325 shares between August 15th and 17th. Those insiders’ resolve has paid off, as RBA shares have climbed by 17% since August 14 to hit a 52-week high.
Hedge funds have also been buying up RB Global, Inc. (NYSE:RBA) shares in droves in 2023, as the number of funds long RBA jumped by just over 50% during Q1. Scott Ferguson’s Sachem Head Capital and Jeffrey Smith’s Starboard Value were two of the many funds to add RB Global to their 13F portfolios during the March quarter.
RB Global, Inc. (NYSE:RBA) is currently trading at a steep discount to its weighted average valuation (WAV) according to the proprietary model created by Canadian fintech company Stockcalc. Shares of the global omnichannel vehicle marketplace had a WAV of over $96 as of June 30 according to the model’s calculations, which factors in everything from discounted cash flow, to various multiples, to analysts’ ratings. RBA shares currently trade for just $68.
RB Global’s recent merger with IAA received some investor pushback, including from Christian Leone’s Luxor Capital Group, which claimed it would destroy shareholder value. For its part, the company believes it can achieve cost reductions and other synergies through the merger that could boost EBITDA by as much as $900 million.
2. Energy Transfer LP (NYSE:ET)
Number of Hedge Fund Shareholders: 34
Three prominent members of Energy Transfer LP (NYSE:ET)’s executive team have purchased shares of the company since August 17, buying up just over 3 million in total. Former CEO and current Executive Chairman Kelcy Warren bought the bulk of that amount in three separate transactions between August 17th and 21st. Co-CEO Marshall McCrea and EVP Bradford Whitehurst have also bought ET shares since August 22.
Hedge fund ownership of Energy Transfer LP (NYSE:ET) hit a ten-year high at the end of 2022 before dipping slightly during the first half of this year. Investing icon Leon Cooperman built a large stake in ET during Q2, adding over 11.9 million shares to the 13F portfolio of Omega Advisors. ET shares have continued to trend up this year, gaining another 15% and have nearly tripled since hitting their pandemic floor in March 2020.
The market reaction was mixed to Energy Transfer LP (NYSE:ET)’s Q3 earnings report. Crude and natural gas transportation volumes achieved quarterly records, though revenue fell year-over-year and earnings narrowly missed estimates. On the other hand, adjusted EBITDA jumped to $3.54 billion from $3.09 billion a year earlier.
Energy Transfer also continues to improve its balance sheet, having driven its leverage down to just over 4x. The company has suggested that it may look to buy back shares in the future, which clearly emphasizes management’s belief that they are still undervalued.
1. Spectrum Brands Holdings, Inc. (NYSE:SPB)
Number of Hedge Fund Shareholders: 39
Shares of Spectrum Brands Holdings, Inc. (NYSE:SPB) have been on a heater since October 2022, nearly doubling in value, but that isn’t stopping company insiders from buying them up in anticipation of further gains. Executive Chairman and CEO David Mauro and EVP, GC & Corporate Secretary Ehsan Zargar have both bought Spectrum Brands’ shares since August 18, 15,843 of them in total.
Smart money managers are also more bullish on Spectrum Brands Holdings, Inc. (NYSE:SPB) than they’ve been in quite awhile, as the number of funds long SPB hit a three-year high in Q2. Himanshu Gulati’s Antara Capital had a large position of call options underlying SPB shares as of June 30, while Ricky Sandler’s Eminence Capital raised its stake in Spectrum Brands by 222% during Q2 to 1.21 million shares.
Spectrum Brands Holdings, Inc. (NYSE:SPB) has taken various steps to strengthen its balance sheet in recent quarters, including through the divestment of its Hardware and Home Improvement segment. That and other divestitures have caused the company’s revenue to slump over the past decade, but its profitability has greatly improved as it transitions into a pure-play seller of pet and gardening supplies. Adjusted earnings rose by 39% year-over-year in Q3 to $0.75 per share, while adjusted EBITDA climbed by 23% to $98.5 million.
The Heartland Mid Cap Value Fund took a new position in Spectrum Brands Holdings, Inc. (NYSE:SPB) during Q3, citing the stock’s “steep discount to intrinsic value”, as reported in the fund’s Q3 2023 investor letter:
“Consumer Staples. During the quarter, we initiated a new position in Spectrum Brands Holdings, Inc. (NYSE:SPB), another deep value company with multiple self-help catalysts.
After several divestitures in recent years, Spectrum is mostly a pureplay Consumer Staples company focusing on pet care and home and garden supplies, including recognizable brands such as Spectracide lawn and garden products and SmartBone dog treats.
SPB is in the process of transforming itself from an acquisition-oriented holding company into an integrated operating company with sharper focus. As part of that process, the company recently divested its Hardware and Home Improvement segment, selling it to the Swedish conglomerate Assa Abloy for $4.3 billion in cash. We owned Spectrum when this divestiture was originally announced but exited our position when the Department of Justice (DOJ) sued to block the sale. That action threatened to derail SPB’s efforts to improve its balance sheet and shed a highly discretionary segment that was noncore to the company’s strategy.
We recently got clarity on this overhang, when the DOJ reached a settlement with Assa Abloy, allowing the sale to go through. This gives SPB ample capacity to repurchase shares at a steep discount to intrinsic value while setting the stage for operational improvements. Meanwhile, the stock trades at just 7X next year’s EBITDA and 5X to 5.5X normalized EBITDA.”
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Disclosure: None.