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).

OFG Bancorp (NYSE:OFG) had three different insiders purchase shares over the past two weeks or so. To begin with, Chief Financial Officer and Executive Vice President Ganesh Kumar reported purchasing 3,734 shares last Tuesday at a price of $6.04 per share, which are held by his Defined Contribution Plan (401K). After the recent purchase, the CFO holds an ownership stake of 18,730 shares through his 401K Plan. Chairman Julian S. Inclan snapped up 5,000 shares last Monday at a weighted average price of $6.20, increasing his overall stake to 109,109 shares. Last but not least, President and Chief Executive Officer Jose R. Fernandez bought 3,000 shares on January 7 at a weighted average price of $6.82 and currently holds a 233,285-share position.

The publicly-owned financial holding company has 52 branches in Puerto Rico and a subsidiary in Boca Raton, Florida. Hence, the Commonwealth of Puerto Rico, whose economic conditions have been worsening in the past several years due to decreasing population, sustained economic recession, a struggling housing sector, and the Puerto Rican government’s indebtedness and structural deficit, serves as OFG’s main market. This explains why the shares of OFG have declined by 60% over the past year. The company’s net interest income for the nine months that ended September 30 totaled $261.8 million, marking a decrease of 15.9% year-over-year. The decrease reflects a decrease of 13.6% in interest income from loans and a decrease of 27.4% in interest income from investments. Meanwhile, the company’s interest rate spread decreased by 74 basis points to 5.11%, thanks to a decrease in the average yield of interest-earning assets. Tom Brown’s Second Curve Capital upped its stake in OFG Bancorp (NYSE:OFG) by 23% during the September quarter to 936,600 shares.

Ladenburg Thalmann Financial Services (NYSEMKT:LTS) also had a high number of insiders who bought shares last week. Chief Executive Officer and President Richard J. Lampen bought 5,000 units of common stock on Thursday at a weighted average cost of $2.24, and currently owns a holding of 1.13 million shares. Executive Vice President Mark Zeitchick acquired 5,000 shares on the same day at prices that ranged from $2.23 to $2.25 per share, all of which are held by MZ Trading LLC (of which the EVP is the sole managing member). After the recent purchase, MZ Trading LLC owns 2.63 million shares. Furthermore, Chief Operating Officer Adam S. Malamed also purchased 5,000 shares at prices ranging from $2.17 to $2.24 per share, enlarging his holding to 478,478 shares. Last but not least, Directors Richard Krasno and Jacqueline M. Simkin bought 5,000 shares and 10,000 shares, respectively. The latter holds a 1.63 million-share stake through the Jacqueline Simkin Revocable Trust, while the former owns 310,500 shares via the Richard M. Krasno Living Trust.

Ladenburg Thalmann Financial Services is a holding company that operates several broker-dealers and investment advisors. The company reported total revenue of $857.79 million for the nine months that ended September 30, up from $656.30 million reported for the same period of the prior year. Despite achieving optimistic top-line growth, the company reported a net loss of $8.95 million for the nine-month period, compared to net income of $20.03 million reported a year ago. The decrease was mainly due to lower revenue in the Ladenburg segment (which has higher margins than in other segments), which was impacted by a decline in equity capital raising for small and mid-cap public companies. The current stock market turmoil and the falling valuations might hamper companies’ willingness to pursue equity raising, which could further impact Ladenburg’s financial performance. Let’s not forget to mention that the stock is already down by 48% over the past year. Mark Coe’s Coe Capital Management holds an ownership stake of 331,490 shares in Ladenburg Thalmann Financial Services (NYSEMKT:LTS) as of September 30.

Disclosure: None