A number of academic studies have found that the most profitable insider transactions occur in small-cap firms. In this area of the market, stocks are less researched. This means there’s more potential for explosive share price movements.
In this report, we are going to highlight some interesting insider buying in a US small-cap, Party City Holdco Inc (PRTY:US). Party City is a leading party goods retailer that has operations in North America, Europe, Asia, and Australia. The company is listed on the New York Stock Exchange and currently has a market capitalization of $561 million.
Party City Holdco: insider buying
Form 4 filings show that on 19 November, New York-based hedge fund CAS Investment Partners purchased 1.6 million PRTY shares at a cost of $4.00 per share. This transaction – which cost the hedge fund a total of $6.4 million – increased its holding in Party City from 13.7 million shares to 15.3 million shares.
This transaction is significant for a couple of reasons. Firstly, CAS – a value-focused investment manager – is Party City Holdco’s largest shareholder. This means that the hedge fund is likely to have done its research on the retailer.
Secondly, it’s a substantial purchase. It has increased the size of the hedge fund’s holding by more than 10%. It is also the investment manager’s largest purchase of PRTY shares since it began building a position in the retailer last year. This suggests CAS is very bullish on PRTY.
Surprise Q3 profit
Party City shares have surged recently after the company posted a surprise third-quarter profit and provided an upbeat outlook. For Q3, the company reported adjusted net income of $11.0 million, or $0.10 per diluted share. This was a big improvement on the adjusted net loss of $25.7 million, or $0.28 per share the company reported in the third quarter of 2019. Analysts had been expecting a loss of 32 cents per share. Adjusted EBITDA was $49.2 million, versus $17.1 million during the third quarter of 2019.
Looking ahead, the company said that it expects to generate adjusted diluted EPS of $0.31 to $0.37 for the fourth quarter – above the consensus forecast of $0.29. “These results reflect consumers’ desire and willingness to celebrate and are a testament to the agility and discipline with which we are operating the business,” commented CEO Brad Weston.
In light of this performance, we see this buying from CAS Investment Partners as a bullish signal. The hedge fund clearly thinks the stock can continue to rise as the world recovers from Covid-19.