Peter Lynch, who grew the Fidelity Magellan Fund from $18 million to $14 billion in 13 years, once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” As insiders tend to beat the market, investors would do well to track stocks insiders are buying.
In the United States and Canada, the law mandates insiders disclose purchases and sales of company stock and file them on a public database. For public companies, the Securities and Exchange Commission (SEC) states that all but the smallest of microcaps that trade on the over-the-counter boards have to report insider transactions within two business days.
As a rule of thumb, insider buying is an indicator of management’s confidence in the company and is considered a bullish sign. On the other hand, insider selling is deemed bearish; those in the know may be offloading their stock with an expectation that prices will soon fall.
A 2003 study by Harvard University’s Leslie A. Jeng and Richard Zeckhauser and Yale University’s Andrew Metrick revealed that transactions on stocks insiders are buying beat the market by 11.2% per year. Interestingly, insider sales are not as profitable in comparison. So, which ones should you be looking at?
- PennyMac Financial Services (NYSE:PFSI)
- ACNB Corporation (NASDAQ:ACNB)
- Transocean (NYSE:RIG)
- Talkspace (NASDAQ:TALK)
- Asana (NYSE:ASAN)
- Ironwood Pharmaceuticals (NASDAQ:IRWD)
- Agree Realty (NYSE:ADC)
Stocks Insiders Are Buying: PennyMac Financial Services (PFSI)
Shares Purchased by Insiders in the Last Six Months: 6,406,465 shares
PennyMac Financial Services focuses on servicing U.S. mortgage loans and managing investments related to the U.S. mortgage market.
In a world of instability, PennyMac offers safety and stability, growing at a reasonable pace in the last five years. PFSI stock has outperformed the S&P 500 index by 274.2% and its sector by 288.2% over the past five years. The top line has increased by 39.1% during the same period, and EPS has grown 61.2%.
Mortgage rates have fallen exponentially, producing higher volumes from refinancing, while a hot housing market continues to drive new mortgages.
PennyMac is divided into two subsegments. PFSI’s production segment is responsible for originating and aggregating new mortgage loans, through which it earns fees and potential gains on loans held for sale. The smaller servicing segment is also vital to the company’s bottom line. However, it has higher prepayments that reduced servicing segment results. Overall, though, it’s not something PennyMac can’t handle.
ACNB Corporation (ACNB)
Shares Purchased by Insiders in the Last Six Months: 10,606
ACNB Corporation is a community bank in the Midwest that offers commercial and retail banking, trust, accounting, and insurance services.
The economic recovery in Pennsylvania and Maryland will likely drive earnings growth for ACNB stock as the economy continues its recovery from the novel coronavirus pandemic.
Due to the macroeconomic factors at play, credit demand will increase in the year ahead, which will drive loan growth. Meanwhile, the provision expense will also decrease because due to ample loan loss reserves and a decline in the portfolio’s credit risk. ACNB originated PPP loans totaling $160.9 million in 2020, representing 9.8% of total loans.
The most important reason for my bullishness is Pennsylvania. The state is already open for business, and even the riskiest businesses, including entertainment, gyms, and indoor dining, are hustling and bustling.
Shares Purchased by Insiders in the Last Six Months: 25,810,000
Transocean is the world’s largest offshore drilling contractor. Gasoline prices continue to increase amid what appears to be a full-fledged bull market in commodities.
Transocean offers a range of ultra-deepwater and harsh-environment floaters for deep-sea drilling. As of Feb, 16, 2021, the Swiss offshore drilling contractor operated 27 ultra-deepwater floaters, 10 harsh environment floaters, and two state-of-the-art ultra-deepwater drill ships.
Two pieces of news are sending RIG stock upward recently. First, the company inked a favorable agreement to delay delivery and defer payments for its two new build drillships. An aggregate of $460 million in vendor financing provided by the shipyard considerably improves the company’s short- and medium-term liquidity outlook.
Second, Transocean has announced that it could issue up to $400 million worth of its shares. Normally, a stock sale is not welcome by shareholders because of dilution. But the reaction should tell you that the markets believe the RIG stock sale improves the liquidity outlook for the company.
Shares Purchased by Insiders in the Last Six Months: 5,000,000
Online therapy provider Talkspace is a bit of a controversial pick on this list of stocks insiders are buying. In a reverse merger, it went public via SPAC, or special purpose acquisition company, Hudson Executive Investment (NASDAQ:HEC).
Taking the SPAC route became the most popular way to go public last year and TALK stock was part of that crowd. Several high-profile startups that did not want to go through with the cumbersome paperwork of a traditional IPO took the route. But many analysts are sensing a pattern with the post-merger performance of these investment vehicles.
Researchers Michael Klausner of Stanford Law School and Michael Ohlrogge of the New York University School of Law studied 47 SPACs that merged between January 2019 and June 2020. Their research reveals SPACs tend, on average, to lose a third of their value post-merger, though there are some exceptions such as Draftkings that have bucked this trend.
With this data in mind, one will always be skeptical of pouring more capital into the SPAC space. But Talkspace satisfies a growing customer base. During the pandemic, the feeling of loneliness, isolation, and other causes of anxiety skyrocketed. Even before the virus, the incidence of mental illness among adults was increasing.
Talkspace is a top-rated mobile and online therapy company offering 24/7 access, no commutes, lower costs, and the ability to swap out appointment times and therapists. You fill out a form, choose from a list of available therapists and start you are on your way. Understandably, this asset-light model, along with the pandemic, has helped Talkspace grow by leaps and bounds. It shows that not every SPAC is a bad one or should not be taken seriously.
Shares Purchased by Insiders in the Last Six Months: 2,676,200
Asana is a web and mobile application platform that helps teams organize, track and manage their work. Now you might be thinking, another team-based work management software? there are plenty of those out there. Bitrix24, Monday.com (NASDAQ:MNDY) and Slack (NYSE:WORK) are just a few of the companies out there offering solutions to increase effective team management, team building, and team collaboration. But Asana is unique among the galaxy of project management applications out there.
Co-founder of Facebook (NASDAQ:FB) Dustin Moskovitz developed Asana, building the social network. A major challenge was dealing with managing the growth. Simply put, email was not cutting it. This is why Facebook built its own collaboration system, which was essential. But when Moskovitz left, he took this idea and created his own system called Asana.
But it was more than just about whiz-bang technology. He strove to give Asana an experience much like a top consumer app.
The strategy was spot-on, as the growth has been strong. In the latest quarter, revenues shot up by 55% on a year-over-year. True, a big catalyst has been the Covid-19 pandemic as there has been a scramble for managing at-home employees. There are currently more than 89,000 paying customers.
It has had a nice move for the year so far for ASAN stock, up about 34%. But the momentum is likely to continue. After all, even as things normalize with the virus, it still seems like a good bet that remote work will be pervasive.
Ironwood Pharmaceuticals (IRWD)
Shares Purchased by Insiders in the Last Six Months: 2,365,000
Ironwood Pharmaceuticals develops, manufactures and distributes gastrointestinal products. Its chief product is linaclotide, an IBS treatment marketed under the LINZESS brand in Mexico and the United States and CONSTELLA in Canada and Europe. IRWD stock is listed on the NASDAQ Global Select Market and currently has a market capitalization of $1.99 billion.
Throughout last year, the company delivered excellent performance. For the period, adjusted EBITDA was 9%. Non-GAAP net income jumped by 49%. This positive momentum has continued in 2021.
It managed to generate $73.7 million in cash from operations during the first quarter compared to $43.6 million in the year-ago period. Total revenue jumped 11% year-over-year to $89 million, driven mainly by U.S. LINZESS collaboration revenue of $86 million. The pharmaceutical company ended the quarter with $438 million in cash and cash equivalents. That is plenty of moolah to conduct M&A activity.
Looking ahead, the company is forecasting revenue within the range of $370 million to $385 million and adjusted EBITDA of over $190 million.
Agree Realty (ADC)
Shares Purchased by Insiders in the Last Six Months: 61,695
Agree Realty is a retail-focused real estate investment trust (REIT). Usually, these investment vehicles are popular with income investors because of the way REITs are structured. The SEC says: “To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90% of its taxable income to shareholders annually; in the form of dividends.”
Therefore, for income investors, these companies are a bonanza. But due to the pandemic and the general skepticism surrounding retail, things cooled down last year for ADC stock. However, since that time, Agree has been consolidating its position. Its financials and stock price indicate that the comeback has well and truly taken place.
Adjusted funds from operations (AFFO) for the first quarter increased 41.1% year on year to $52.5 million. AFFO is a measure of the financial performance of a REIT, and it is used as an alternative to funds from operations (FFO).
The REIT invested nearly $391 million in 90 retail net lease properties and declared an April monthly dividend of 21.7 cents per share, an 8.5% year-over-year increase.
There will be investors who think there is a limited upside to exploit. ADC stock is trading at 40.7 times price-to-earnings. But considering there is so much bullish insider activity and shares are up just 9.7% year to date, the company is a buy for me.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.