Our research on insider trading activity has highlighted the fact that studies generally show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). The theoretical explanation for this finding is that insiders already have an economic connection to the company, so in general it is rational for them to diversify their wealth; when the buy their company’s stock instead, it should tend to be due to high confidence in the company. Investors can therefore use insider purchases similarly to stock screens as ways to identify stocks which may prove to be worth a closer look. Read on for our quick take on five stocks which insiders have bought recently.
One stock where we recorded a recent insider purchase is Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Valeant Pharmaceuticals Intl Inc (NYSE:VRX), a $33 billion market cap pharmaceutical company, reported more than a 30% increase in revenue last quarter compared to the second quarter of 2012. Markets have reacted positively to the company’s results, sending the stock up more than 60% in the last year even as pretax income has been negative year to date.
In addition to insider trading activity, we track quarterly 13F filings from hundreds of hedge funds and other notable investors. This is useful in our research on investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year and our own portfolio based on these results outperformed the S&P 500 by 33 percentage points since inception 11 months ago. Learn more about our small cap strategy. We can also use our database to track interest in individual stocks, and can see that billionaire Andreas Halvorsen’s Viking Global owned 9.5 million shares of Valeant Pharmaceuticals Intl Inc (NYSE:VRX) as of the end of June (see Halvorsen’s stock picks).
Multiple Board members have been buying shares of Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), which has roughly doubled so far in 2013. Billionaire David Einhorn of Greenlight Capital has publicly advocated shorting the stock, anticipating increased competition and falling margins (we’d note that it’s still down bit from his original short call), but recent reports show double-digit growth rates on both top and bottom lines. Investors are generally expecting high growth over the next several years, resulting in a trailing P/E of 30. A number of market players have joined Einhorn in shorting Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), and so 38% of the float is held short.