RILYP - Strong Small-Cap Insider Buys: Q1 2023

2023-04-26 00:15:28 ET

Summary

• After bringing you the first quarter installment covering large-cap and mid-cap insider activity, today's article will focus on the latest insider activity within the small-cap range.
• We believe that insiders supply the market with high-quality information each time they decide to trade their own company's stock on the open market.
• Companies including B. Riley Financial, Enovix Corp, Paramount Group, Summit Therapeutics, and PacWest Bancorp made their way to our small caps list for the first quarter.
• The following is a group of interesting small-cap stocks that we consider research-worthy, having recently attracted significant interest from their corporate insiders.

What were some strong insider buys in Q1?

In order to search for companies that experienced periods of particularly concentrated corporate insider purchasing activity, we once again evaluated hundreds of S-4 filings in the fourth quarter. Our article today will focus its discussion solely on small-cap stocks, for the purposes of this analysis, we stand behind the definition of small-cap companies as publicly listed companies with a market capitalization of less than $2 billion. Attention was focused on companies that enjoyed buying across the board from multiple insiders, in quantities that were not recorded previously, often after a period of the selloff. Our original thesis and main article can be accessed here . The first-quarter article on large-caps available here , and the mid-cap coverage is available through this link .

Below is our list of research-worthy small-caps that, in our view, enjoyed a period of unusual and atypical interest from corporate insiders.

PacWest Bancorp ( PACW )

• Active Corporate Insiders: 10

• One-Year Performance: -68.2%

• Total Bought Back: $1,815,163

• Average Price: $20.47

It would seem to be a reoccurring theme for the insider data in the first quarter of this year; bank insiders took things up a notch and are currently center stage. PacWest Bancorp has been one of the banks most impacted by the banking crisis if we are to exclude the obvious ones that are no longer among us. The bank generated a dreadful negative one-year return of 68.2% as well as a year-to-date return of -51.8%. At the time of writing this article, still around 10% of the float of the stock is shorted, implying that bears still believe the worst might not be over for PACW. With regulators struggling to contain the banking crisis at the moment, insiders such as CEO Paul Taylor, COB Matthew Wagner, COO Mark Yung, and a dozen other directors have stepped up and bought some $1.8 million worth of PacWest in the first quarter. The estimated average they paid for shares of their bank is $20.47, which effectively constitutes double what PACW is selling today. After the selloff we discussed, PACW is sitting at some depressed valuations, being traded in the open market for an NTM P/E of 5.35x and a P/BV of 0.34x, meaning the bank sells for one-third of its book value. Both Wall Street Analysts and SA Authors remain fairly optimistic about the bank's future potential, especially at these prices. Subsequently, both have assigned PACW a "Buy" rating, with a 3.87/5.00 and 3.80/5.00 score, respectively. PacWest Bancorp shares can currently be bought for $11.06.

B. Riley Financial ( RILY )

• Active Corporate Insiders: 8

• One-Year Performance: -43.7%

• Total Bought Back: $11,691,774

• Average Price: $35.79

There are few companies on the Street that have insiders with an insider buying track record like those at B. Riley Financial. For quarters on end, RILY insiders have been topping insider data charts, and have faithfully followed the share price from the high range of $80–90 where the firm traded just two years ago, to where we find ourselves today with the share price nearly one-quarter of that. The degrading macroeconomic situation created several challenges for its investment banking and financial services businesses. The situation escalated gruesomely to the point where Wolfpack Research published a 24-page short report on the firm back in February, adding even more to the downward pressure on the stock. In short, the firm was defined as a "second-tier financial institution" at best and a lender of last resort at worst that carries a balance sheet full of speculative assets and bad loans, threatening the collapse of the investment firm. On a one-year basis, the company's market value has been just about split down the line. Shorts sellers hold close to a quarter of the outstanding shares and even the questionable assets on their books trade for an x1.71 P/BV. Management still wants to stick with the dividend, which amounts to $1 per quarter or a 15% dividend yield given today's prices. Insiders, including COB Bryant Riley, CEO Andrew Moore, COB Bryant Riley, as well as half a dozen other directors have again stepped up and bought $11.69 worth of RILY shares for an estimated paid price of $35.79. It is worth noting that the financial firm currently trades at $32.11 per share.

Enovix Corp ( ENVX )

• Active Corporate Insiders: 2

• One-Year Performance: 31.5%

• Total Bought Back: $4,815,000

• Average Price: $11

Enovix Corporation is a relatively young California-based firm that is in the business of designing, developing, and manufacturing advanced lithium-ion batteries. The company sees endless potential in fueling society's push for renewable energy transformation with its high-density silicon-anode lithium-ion batteries. The primary short-term objective of the firm is to provide phone companies with category-leading high-energy batteries, while the short-to-mid-term goal is to develop its 3D cell technology and production process for the electric vehicle and energy storage markets. Enovix Corp is virtually a pre-revenue company, but they do sit on some $300 million in cash with limited or no liabilities, which does set them up decently. However, at the moment, the firm finds itself burning through cash with negative multiples across the board and a close to 20% short float, with many investors "not buying" their entry into the renewables revolution. Insiders purchasing ENVX shares for the quarter included the company's CEO Raj Talluri and Thurman Rodgers, who is both a director and a 10% owner of the company. They bought back $4.8 million worth of Enovix Corp shares for an estimated average paid price of $11. The company is held in very high regard by Wall Street Analysts, who have assigned it a "Strong Buy" rating with an average score of 4.83/5.00. On the other end, Seeking Alpha Authors have assigned it a "Buy" rating with an average score of 3.75/5.00. Shares of the stock can be bought for $13.05.

Paramount Group ( PGRE )

• Active Corporate Insiders: 3

• One-Year Performance: -58.2%

• Total Bought Back: $1,880,351

• Average Price: $4.83

Ever since the lockdowns back in 2020, office REITs have been struggling to regain a foothold in the REIT space. The leveraged nature of their balance sheets, reflecting badly on the stark increase in interest rates, combined with the bleak prospects of the future, mainly impacted by the rise of remote and hybrid work, makes for a solid bear case. Paramount Group is an operator of a premium office real estate portfolio anchored mainly in attractive markets such as New York and San Francisco. The real estate portfolio consists of 19 premium properties and 15 million square feet of rentable area. PGRE is having a tremendously difficult time, down 58.2% on a one-year basis, as well as 29.2% year-to-date, underperforming the S&P 500 ( SPY ) by a wide margin. The market currently values the O-REIT at less than five times its forward FFO, while it offers a forward dividend yield of 6.90%. Both Seeking Alpha Authors as well as Wall Street Analysts remain unsure about the future prospects of PGRE, assigning it a "Hold" rating group with an average score of 2.75/5.00. For several quarters already, insiders have been stepping up and buying shares of the office REIT. This quarter was no different given that the COB and CEO Albert Behler, SVP Gage Johnson, and Director Thomas Armbrust bought $1.88 million worth of Paramount Group shares. Shares of the REIT can be purchased for $4.20 as of the time of writing this article.

Summit Therapeutics Inc ( SMMT )

• Active Corporate Insiders: 3

• One-Year Performance: -26.5%

• Total Bought Back: $420,223,950

• Average Price: $1.05

We usually try to make it a point to avoid discussing small-scale biotech companies due to the nature of the business and the volatility in the stock prices, but when insiders buy nearly half the market cap of a stock within a single quarter, it becomes difficult not to at least bring things up. Summit Therapeutics is a Massachusetts-based biopharmaceutical company best known for developing the phase III Ivonescimab drug that assists the immune system in killing tumors. Insiders had already established a significant foothold within the company during the previous couple of years, but with CEO Robert Duggan, CFO Ankur Dhingra, and Co-CEO Mahkam Zanhaneh scooping up the latest rights offering , they now own nearly 80% of the company. The insiders spent a total of $420+ million in the first quarter buying shares of SMMT for an estimated average price of $1.05 per share, and have once again left room for speculation on whether or not they are taking SMMT private. Robert Dugan is well-respected within the industry for engineering the turnaround story of the former biopharmaceutical company Pharmacyclics, having taken over the company while it was trading for under a dollar per share, only to later sell it to pharma giant AbbVie ( ABBV ) in a $261 per share deal back in 2015. SA Authors remain unconvinced of his new endeavor and have rated the company as a "Hold" with an average score of 3.33/5.00. Summit Therapeutics is currently trading at $1.41 per share.

Other somewhat less notable small-cap stocks with a strong insider buying record for the first quarter that have failed to make it into the shortlist include Triumph Financial ( TFIN ), Heartland Express ( HTLD ), American Assets Trust ( AAT ), OPKO Health ( OPK ), JELD-WEN Holding ( JELD ), Cassava Sciences ( SAVA ), Cimpress ( CMP ), Byline Bancorp ( BY ), iHeartMedia ( IHRT ), Mineralys Therapeutics ( MLYS ), The Chemours Company ( CCO ), Coastal Financial Corporation ( CCB ), Vera Therapeutics ( VERA ), LendingTree ( TREE ), Purple Innovation ( PRPL ), and Precigen ( PGEN ).

Closing arguments

Given the increasing challenges posed by the banking crisis, whose reach is still not fully comprehended nor digested by the market, the willingness of bank and other financial services company insiders to signal confidence to shareholders by purchasing their own shares is quite intriguing and should not go unnoticed given the current circumstances. It represents a significant bullish signal for the future heading of the financial services sector, quite similar to the one concerning the energy sector that we discussed in the previous two articles. In that context, the companies we discussed today could, in our view, be worthy of further research.

For further details see: