Five Small Cap Stocks Insiders Are Crazy About, Including Howard Hughes Corp (HHC) & Halcon Resources Corp (HK)
Our research on insider trading patterns has concluded that stocks bought by insiders tend to outperform the market following these purchases, particularly if multiple insiders are buying (read our analysis of studies on consensus insider purchases). We’re also big believers that small cap stocks are more likely to be mispriced than larger companies which receive constant attention from the financial media and from large institutional investors such as mutual funds. As a result, we like to treat multiple insider purchases similarly to a stock screen- as a signal that a company may be worth taking at least a brief look at to decide whether or not it might be undervalued and therefore worthy of further analysis. Here are five stocks with market capitalizations between $1 billion and $5 billion which multiple insiders have bought recently:Multiple insiders were buying shares of real estate developer Howard Hughes Corp (NYSE:HHC), signaling that they believe that real estate markets will continue to recover. Last quarter Howard Hughes Corp (NYSE:HHC) delivered over a 60% increase in revenue compared to the second quarter of 2012, roughly matching the rate at which the stock price has risen in the last year; operating income has surged as well. Wall Street analysts expect $3.37 in earnings per share in 2014, making for a forward earnings multiple of 31.
In addition to insider trading activity, we also track quarterly 13F filings from hedge funds and other notable investors. We’ve found that, on average, the most popular small cap stocks among hedge funds achieve an average excess return of 18 percentage points per year; putting this theory into practice, last summer we launched a small cap portfolio following this strategy which has since outperformed the S&P 500 by 33 percentage points. Learn more about our small cap strategy. We can also use our database to track hedge fund interest in individual stocks. For example, billionaire Bill Ackman’s Pershing Square owned 3.6 million shares of Howard Hughes Corp (NYSE:HHC) last quarter (see Ackman's stock picks).
Oil and gas exploration and production company Halcon Resources Corp (NYSE:HK), focused on shale fields in the onshore U.S., is down 41% in the last year and still has 17% of its float held short. A number of insiders have reacted to this bearishness by buying the stock. Production has been up in percentage terms, but Halcon Resources Corp (NYSE:HK), is still depending on further increases in order to hit sell-side targets for next year. If the company does meet analyst forecasts, then the forward P/E would be only 15 and so we’d be interested in following further results from the company.
American Campus Communities, Inc. (NYSE:ACC), a real estate investment trust which invests in student housing properties, also meets our criteria of multiple insiders buying the stock within the last month. Because real estate investment trusts must distribute a large share of taxable income to shareholders in order to preserve their favorable tax treatment, they often pay high yields; American Campus Communities, Inc. (NYSE:ACC) is no exception with an annual yield of 4.3%. We’d note that the stock has dropped nearly 30% year to date. Highbridge Capital Management, managed by billionaire Glenn Dubin, was buying the stock last quarter (check out more stocks Dubin was buying).
Another real estate investment trust which insiders are excited about is Healthcare Trust Of America Inc (NYSE:HTA), which as might be implied from the name invests in health care related real estate such as medical office buildings. With quarterly dividend payments of 14.4 cents per share, the yield is 5.6% at current prices. In statistical terms, Healthcare Trust Of America Inc (NYSE:HTA) has a fairly low beta- of 0.4- and it does make some sense that healthcare related real estate would be less sensitive to changes in the overall economy than residential or general commercial.
Finishing off our list of small caps with multiple insiders buying recently is $2.7 billion market cap aerospace equipment manufacturer Woodward Inc (NYSE:WWD). In its most recent quarter, Woodward’s sales grew by 5% compared to the same period in the previous fiscal year but this was offset by higher costs; as a result, pretax income was down slightly. Woodward Inc (NYSE:WWD) carries trailing and forward earnings multiples of 20 and 16, respectively, and so markets seem to have priced in expectations that business will grow moderately over the next few years.
Disclosure: I own no shares of any stocks mentioned in this article.