Why Are Insiders Bullish On These 3 Companies?

Most investors are awaiting a fundamental catalyst to diminish their concerns about the potential impact of a slowing global economy on the U.S economy and put a halt to the equities sell-off. Just recently, hedge fund manager Ray Dalio suggested that the Federal Reserve is likely to reverse the course of its monetary tightening cycle. There are too many contradictory opinions flooding the stock market arena at the moment, so investors need to exhaustively digest all of the information. At this point in time, there is no reason to believe that the U.S economy is cooling down: the labor market is tightening, while the depressed crude oil prices will most likely boost consumer sentiment. In the meantime, certain companies witnessed noteworthy insider purchases in recent weeks, which can be interpreted as bullish signals from investors with the most knowledge of their companies. Hence, this article will focus on discussing the insider trading behavior at those companies and their recent performance.

Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35%-to-45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.

Campus Crest Communities Inc. (NYSE:CCG) had one of its insiders purchase a sizable block of shares last week. Director Raymond C. Mikulich acquired 10,000 shares on Friday at $6.77 apiece, lifting his overall holding to 91,900 shares. It should be mentioned that the Director has been gradually acquiring more shares over the past several months, so he clearly sees some value that has yet to be unleashed. On October 16, the real estate investment trust (REIT) that focuses on student housing agreed to be acquired by Harrison Street Real Estate Capital LLC for $6.90 in cash and a contingent consideration of approximately $0.13 for each share owned. The contingent consideration represents the net sale proceeds from the sale of the company’s ownership interest in the evo Montreal joint venture. The sale of Campus Crest Communities Inc. (NYSE:CCG)’s ownership interest in the joint venture was completed at the end of October, with its shareholders set to receive $0.12 per share from that transaction.

Moving on to a potential reason behind the Director’s decision to buy stock, it is highly likely that the Director is attempting to benefit from the discrepancy between the company’s current market price and the actual sale price. The stock trades $0.16 below the $6.90 figure, which is not too much if considering the downside associated with the potential failure of the deal. Hence, the recent insider buying activity at the REIT might point to high odds that the deal will go through. There were 11 hedge funds from our system with positions in the REIT at the end of the third quarter, which had accumulated 27% of its shares. Derek C. Schrier’s Indaba Capital Management holds 5.93 million shares of Campus Crest Communities Inc. (NYSE:CCG) as of September 30.

The next two pages of this daily insider trading article reveal the insider purchases registered at Endocyte Inc. (NASDAQ:ECYT) and Kronos Worldwide Inc. (NYSE:KRO).

Endocyte Inc. (NASDAQ:ECYT) had not witnessed any insider buying activity since the end of 2011 until last week. Director Fred A. Middleton purchased 20,000 shares last Friday and 10,000 shares on Tuesday at prices that ranged from $2.78 to $2.84 per share. After the recent purchases, the Director holds a direct ownership stake of 200,999 shares. The biopharmaceutical company mainly focuses on developing therapies for the treatment of cancer and inflammatory diseases. Specifically, the company uses its proprietary technology to build small drug conjugates, known as SMDCs, which target receptors that are over-expressed on unhealthy cells. Each SMDC includes three modules: a targeting ligand, a spacer/linker, and a drug payload. The company’s spacer/linker systems are designed to be stable in the bloodstream and release the active drug from the targeting ligand only when the SMDC is absorbed by the unhealthy cell.

During the third quarter of 2015, the company completed its TARGET trial, a randomized phase 2b trial of vintafolide for use in non-small cell lung cancer, aimed at evaluating the safety and efficacy of vintafolide in second line NSCLC as a single agent and in combination with FDA-approved chemotherapy treatment docetaxel. The final results of the trial were in-line with previous findings. Although there is a long road to travel before the company’s products will be brought to market, long term-focused investors might find the stock an attractive bet at the moment. The stock has lost 43% over the past year, so the recent insider purchase might point to a rebound in the future. The number of hedge funds from our database with positons in the company climbed to ten from seven during the third quarter. Baker Bros. Advisors, managed by Julian Baker and Felix Baker, acquired a 1.36 million-share stake in Endocyte Inc. (NASDAQ:ECYT) during the third quarter.

An extremely high volume of insider buying has been registered at Kronos Worldwide Inc. (NYSE:KRO) over the past several weeks. Chairman Steven L. Watson has purchased 86,095 shares since January 11 at prices that ranged from $4.10 per share to $4.65 per share, boosting his overall stake to 627,747 shares. The Chairman purchased an additional 50,000 shares in 2016 (before January 11) at prices that fell between $4.79 and $5.00 per share. The global producer and marketer of value-added titanium dioxide pigments (TiO₂) has seen its shares decline by 61% since the end of January 2015. TiO₂ is mainly used for manufacturing applications, which include paints, plastics, and paper, to name just a few.

The company’s financial performance has been impacted by increased competition, which put significant pressure on Kronos’ average selling prices throughout 2014 and the first nine months of 2015. Kronos reported net sales of $1.06 billion for the nine months that ended September 30, down from $1.28 billion reported a year earlier. Moving back to the depressed prices, the average selling prices at the end of the third quarter of 2015 were 3% lower relative to the prices registered at the end of the previous quarter and 13% lower than prices at the end of 2014. The company kicked off a restructuring plan during the second quarter of 2015 to enhance its cost structure, mainly via workforce cuts, in anticipation of this. A mere six hedge funds tracked by Insider Monkey were invested in the company at the end of the third quarter, with them amassing just 0.30% of its shares. Ken Griffin’s Citadel Advisors LLC owns 161,061 shares of Kronos Worldwide Inc. (NYSE:KRO) as of September 30.

Disclosure: None