Earlier this week I looked at companies where one or both of the top two executives of a publicly traded company were buying the stock in the open market. My research shows that this is usually an indication of good things to come for the company and the stock price. The same holds true of what are known as insider-cluster buys. This is buying by three or more insiders, be they officers or directors, within a short period.
Research by Victor Niederhoffer and James Lorie uncovered this anomaly in the 1960s and University of Michigan Professor Nejat Seyhun and others have confirmed it. This market anomaly cannot be arbitraged away because it is based on legal insider information. The officers and directors know more than outside investors do, and if we can buy at close to the same price, it makes sense to mirror their trades. It makes even more sense if we limit our buying to those stocks that are also cheap on an asset basis.
If we expand our research to companies with cluster buying, it becomes even more apparent that insiders in high-yield investment vehicles like mortgage real estate investments trusts and business development companies feel good about their prospects in 2014. Mortgage REITs seeing cluster buying include Annaly Capital (NLY), MFA Financial (MFA) and American Capital Agency (AGNC). All have very high yields and if asset values stop contracting and level off, these leveraged investments could provide large returns for aggressive investors next year. BDCs seeing cluster buying include Gladstone Investment (GAIN), Horizon Technology Financing (HRZN), Fifth Street Finance (FSC) and Monroe Capital (MRCC). Income-seeking investors should pay particular interest to this strong insider-buying signal in these two sectors.
Real estate is seeing strong inside buying as well. Summit Hotels (INN) is trading below book value and owns a portfolio of mid- and upper-end limited service hotels across the U.S. The stock is also going to be of interest to income as well as asset-based investors as the stock yields 5% at the current price. Although it is not trading below book value, Digital Realty Trust (DLR) and Mid-America Apartments (MAA) have also seen year-end cluster buying.
I have no idea what precious metals will do next year. They took a beating this year as investors dumped the metals while selling off exchange-traded funds with physical metals added to the decline. I do know that shares of Coeur Mining (CDE) are trading at just about half of book value and insiders have been buying. Four insiders including the CEO and CFO were open-market buyers of the stock during the last two months of 2013. I have no idea when metals will rally but if they do so in the next five years, or even the next decade, Coeur could see its stock price rise by many multiples of the current quote.
Fellow Real Money contributors Sham Gad and David Peltier have been bullish on Ballantyne Strong (BTN) for some time. The company makes digital theater technology and digital media marketing solutions. The market cap is about $64 million and, as of the end of the third quarter, it had about $26 million in cash with no debt. Five different insiders, including the CFO, were buying stock in late 2013 in anticipation of improving business conditions and a higher stock price. The stock trades at about 95% of tangible book value, so the shares are certainly cheap at this price.
Two of our energy long shots have also seen insider-cluster buying. Harvest Natural Resources (HNR) insiders are bullish on its prospects now that it seems to have a deal to unload its Venezuelan properties. Six insiders were buyers of a late-year stock offering. Eight insiders at Halcon Resources (HK) believe that management's turnaround plans will be successful and were late-year buyers of their own stock. Both have tremendous upside form current levels and patient investors looking for returns of multiples rather than percentages may want to follow insiders into these shares.
Investors spend a lot of time looking for magic signals in charts and news stories, often with little success. The real magic signal in the stock market is insider buying, especially in companies that are undervalued on an asset basis.