Insider trading arrests yesterday show how inside information can be funneled to hedge funds. The process makes hedge fund clients rich at the expense of unsophisticated ordinary investors. Illegal insider trading is definitely profitable but relatively risky. It’s possible to eliminate the risk but still profit from insider trading. Academic studies have shown this to hold true for the past 50 years and across the globe. Insider purchases beat index funds by more than 7% per year when there are several insiders purchasing. Two weeks ago we published the list of companies with at least three insiders buying. Six of the seven companies beat the index funds during the following week. Last week we published six more companies with insider purchases. Here is how those six stocks performed:
2. Black Hills Corp (BKH): We mentioned that we didn’t like to pay a 3% premium for this electric utilities company. The stock went down by 0.3%, underperforming the market index by more than 1 percentage point.
3. World Heart Corp (WHRT): This is another stock that underperformed the market index. It returned 0.5% during past week. But this is a very illiquid stock and we usually stay away from it.
4. Town Sports International Holdings Inc (CLUB): We added this stock a month ago to Insider Monkey’s hypothetical portfolio when it was trading at $3.01. This Thursday it closed at $3.71. The stock returned 1.9% during the past week and 23.2% during the past month.
5. Career Education Corp (CECO): Career Education Corp went up by 1.1% during the past week, beating the market.
6. Raymond James Financial Inc (RJF): We declined to imitate Raymond James insiders because the transactions didn’t appear to contain any information at all. However, the stock returned more than 2.5%, beating the market.
Overall consensus criteria beat passive investing by 3-2 last week. The average return for this portfolio was 1.2% during the past week, 0.3 percentage points higher than the market return. Of course, this is just a very small sample and does not prove or disprove the credibility of monkeying insider purchases
Here are the four stocks insiders were buying like crazy this past week:
1. Town Sports International Holdings Inc (CLUB): Insider purchases have been going on here for the past one and a half months. This is one of the two stocks we added into our hypothetical portfolio in November. Since then the stock went up by 23%. Currently it trades around $3.71. One insider, Bruce Bruckmann, purchased nearly 27,000 shares at $3.65-$3.70 on Tuesday.
4. Scientific Games Corp (SGMS): Insiders seem to be done with their purchases. They paid as high as $9.75 for SGMS, and the stock trades at $9.42. Jim Cramer didn’t recommend buying SGMS last week in Mad Money. Nevertheless, we are sticking with the insiders here.
Disclosure: I am long SPY.