Research shows that following insider buying at smaller companies tends to be a more profitable strategy than following insider buying at larger firms. Smaller companies are less researched than larger companies, meaning that they offer greater potential for outperformance.
Here, we are going to highlight insider buying in a US small-cap stock, American Outdoor Brands Inc (AOUT:US). American Outdoor Brands is a manufacturer of outdoor sporting accessories, specialty tools, and other recreational products. It was recently spun off from Smith & Wesson Brands Inc. The company is listed on the NASDAQ Global Select Market and currently has a market capitalization of $188 million.
American Outdoor Brands: insider buying
What has caught our attention here is a series of insider transactions that took place between 21 September and 23 September. Form 4 filings show that over this period, four insiders at American Outdoor Brands purchased shares. Those buying included President and CEO Brian Murphy (10,000 shares @ $13.28 per share) and CFO Hugh Fulmer (10,000 shares @ $13.26 per share). Combined, the four insiders spent around $420,000 on AOUT stock.
Source: 2iQ Research
This pattern of insider buying is worth highlighting for a few reasons. Firstly, these are top-level insiders that have bought stock. It’s likely that both Murphy and Fulmer have strong insight into the company’s recent performance.
Secondly, cluster buying – where multiple insiders are buying within a short space of time – is one of the most powerful patterns in insider transaction analysis. It can be a strong signal that the stock is undervalued.
Good Q1 results
American Outdoor Brands shares have underperformed since the spin-off from Smith & Wesson Brands in late August.
However, first-quarter results, issued in early September, looked pretty good. For example, quarterly net sales were $50.5 million, an increase of $17.3 million, or 52%, over net sales of $33.2 million for the comparable quarter last year. Meanwhile, quarterly net income was $1.8 million, or $0.13 per diluted share, compared with a net loss of $(5.0) million, or $(0.36) per diluted share last year. “We are excited about our future,” commented President and CEO Brian Murphy.
In light of these strong results, we see the insider buying here as a bullish signal. It indicates that insiders are confident about the future and that they see the stock as undervalued at present.