Following insider buying in small-cap stocks tends to be a more profitable strategy than following insider buying in larger stocks. Smaller companies are less researched than larger companies, meaning that they offer greater potential for ‘surprises’ that can lead to outperformance.
In this report, we are going to highlight a large insider purchase at a small US-listed company, Farmer Brothers Co (FARM:US). Farmer Brothers is a roaster, wholesaler, and distributor of coffee, tea, and culinary products. Its customers include restaurants, foodservice operators, convenience store chains, hotels, casinos, healthcare facilities, and grocery chains. It is listed on the Nasdaq and currently has a market cap of $91.7 million.
Insider buying at Farmer Brothers
Our data shows that on October 5, Bradley Radoff – who is part of a group that owns more than 10% of Farmer Brothers’ stock – purchased 50,000 FARM shares at a price of $5.05 per share for the Radoff Family Foundation. This trade cost the insider $252,310 and took his total direct and indirect holding to 325,000 shares.
This trading activity is worth highlighting due to the fact that Mr. Radoff is an experienced investor. Currently, he serves as Principal of Fondren Management LP, a private investment management company. Previously, he served as Portfolio Manager at Third Point LLC and as a Managing Director of Lonestar Capital Management LLC. Given his background, he is likely to have a good understanding of Farmer Brothers’ investment potential.
Farmer Brothers’ most recent quarterly results, for the period ended June 30, were good.
For the quarter, net sales were up 20% year on year to $123.0 million (versus the consensus estimate of $110.90 million), thanks to a notable improvement in direct-store-delivery and direct ship channels. Meanwhile, gross margin improved to 28.4% from 27.6% a year earlier. Adjusted EBITDA was $6.1 million compared to $3.4 million in the prior year period.
Looking ahead, management was confident about the future. “Though economic uncertainty remains a modest near-term restraint on our progress, we believe we’re now turning the corner and moving into a more normalized business environment. Sales are gaining momentum, and we are executing new growth opportunities to expand our platform in multiple directions. Overall, we are excited to see that many of our optimization initiatives have materialized as our current growth-facing initiatives begin to take hold. We remain optimistic about where we can take Farmer Brothers in our fiscal 2023 year and the years to come,” said CEO Deverl Maserang.
In light of these results, we see the insider buying here as a bullish indicator.