Why Are These Insiders Ignoring Stock Market Doomsayers?

It has been a very tough start to 2016 for the U.S stock market, as the nation’s equity markets registered their worst ever start to a year. The Chicago Board Options Exchange Volatility Index, also known as the VIX, jumped above 30 on Friday, indicating that equity trading is associated with an extremely high level of volatility and uncertainty at the moment. Similarly, the fourth-quarter earnings season kicked off last week, which serves as an explanation as for why last week’s insider trading activity weakened relative to the activity during the week prior to that. Last week’s volume of both insider buying and selling halved compared to the prior week, while the level of insider selling has been the lowest witnessed in the past four years or so, as executives hold on to their declining shares, confident in a future rebound. In that vein, there was a camp of insiders who were not only holding on to their shares, but also piling up more shares of their companies, which suggests that those insiders anticipate future stock price appreciation. The Insider Monkey team pinned down three companies that registered noteworthy insider buying last week and this article will discuss those bullish trades and the recent performance of those companies.

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.

Barnes & Noble Inc. (NYSE:BKS) is among the few companies that witnessed insider buying activity this past week. Director Scott S. Cower purchased 5,000 shares on Friday at prices that fell between $8.25 and $8.29 per share, lifting his overall holding to 32,097 shares. The stock of the largest retail bookseller in the nation is down by 44% over the past year and seems to be in a bottoming-out phase at the moment. The company’s financial performance over the past several years has been affected by the growth of the digital book market, as most of its sales are derived from the company’s B&N Retail stores. Barnes & Noble Inc. (NYSE:BKS)’s B&N Retail segment has been affected by secular industry challenges, which have resulted in lower comparable-store sales, lower online sales and store closures. The company’s B&N Retail sales for the 26 weeks that ended October 31 reached $1.80 billion and accounted for 96.1% of its total sales, compared to $1.84 billion reported for the same period a year ago. Barnes & Noble’s NOOK segment comprises the company’s digital business, which includes its eBookstore, digital newsstand and sales of NOOK devices and accessories. Despite experiencing a major shift towards digital content, the company’s NOOK sales for the 26 weeks that ended October 31 decreased to $97.8 million from $133.9 million reported a year ago. The number of hedge funds in our system with positions in the company dropped to 23 from 31 during the September quarter. David Abrams’ Abrams Capital Management reported owning 6.92 million shares of Barnes & Noble Inc. (NYSE:BKS) through its 13F for the third quarter.

Let’s move on to the next two pages of this daily insider trading article, where we discuss the insider purchases reported at OFG Bancorp (NYSE:OFG) and Ladenburg Thalmann Financial Services (NYSEMKT:LTS).