Strong Small-Cap Insider Buys: Q4 2022 Update

What were some strong insider buys in Q4?

In order to search for companies that experienced periods of particularly concentrated corporate insider purchasing activity, we once again evaluated thousands of S-4 filings in the fourth quarter. 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. The original thesis can be read here, and the last quarter’s small caps update on the article can be accessed through this link.

Our article today will focus its discussion solely on small-cap stocks, but the series will be followed up with a fourth-quarter installment covering popular mid-cap companies as well. Fourth-quarter large caps have already been discussed here. 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. Below is our list of research-worthy small-caps that, in our view, enjoyed a period of unusual and atypical interest from corporate insiders.

Hillman Solutions (HLMN)

• Active Corporate Insiders: 3

• One-Year Performance: -3.50%

• Total Bought Back: $1,550,000

The Ohio-based firm is a leading North American provider of hardware products and solutions. Its product offering ranges from hardware and home improvement products to protective and job site gear and goes as far as advanced robotic kiosk technologies. HLMN is a provider of technology-based solutions for a variety of industries. They own and operate brands such as Hillman HW Essentials, GreaseMonkey, Deck Plus, PowerPro, Gorilla Grip, AWP, The Steel Works, and Digz, among others. It had an extraordinary start to the year, yielding 26% year-to-date, effectively erasing the losses it suffered last year. The company hit a low in late December and traded for as little as $6.72 per share. When we exclude the bottom line, Hillman Solutions is trading at a relatively attractive NTM P/FCF of 8.95x and an NTM EV/EBITDA of 13.17x. Both Seeking Alpha Authors and Wall Street Analysts hold the company in high regard, assigning it a “Buy” and “Strong Buy” rating respectively. Insiders purchasing HLMN shares for the quarter included the company’s CTO Kelley Moore, its Treasurer, and CFO Robert Kraft, as well as the President and CEO Douglas Cahill. In a strong joint vote of confidence, they bought just shy of 207,000 shares, or approximately $1.55 million worth, of Hillman Solutions. The purchases were executed in the $7.00-$8.00 range as the company currently trades at $9.44 per share.

MillerKnoll (MLKN)

• Active Corporate Insiders: 1

• One-Year Performance: -42.84%

• Total Bought Back: $1,020,000

MLKN is in the business of designing, manufacturing, selling, and distributing interior furnishings across the globe. MillerKnoll operates an omnichannel sales and distribution strategy, doing business with independent contract furniture dealers, direct customer sales, owned and independent retailers, direct-mail catalogs, and the company’s online stores. The company was created two years ago out of a merger between Herman Miller and Knoll. It now operates a large portfolio of furniture and living brands, including Colebrook Bosson Saunders, DatesWeiser, DWR, Edelman Leather, HAY, Holly Hunt, KnollExtra, Knoll Office, KnollStudio, KnollTextiles, Maars Living Walls, among many others. The furniture manufacturer had a horrible couple of quarters in the markets, ultimately delivering a negative 42.84% one-year return. After the recent pullback, at least on face value, MLKN seems to be a solid value proposition. The firm is currently being sold at an NTM EV/EBITDA of 7.98x, an NTM P/E of 10.20x, and an NTM MC/FCF of 6.79x. On top of that, the company offers a 3.27% dividend yield. Both Seeking Alpha Authors and Wall Street Analysts upheld their bullish views on the stock, rating it “Buy” and “Strong Buy”, respectively. The small company is also a regular winner of government contracts, having been awarded $13 million in government furniture deals since the beginning of 2023. The fourth quarter saw CEO Andrea Owen purchase 60,000+ shares, or approximately $1 million worth, of MLKN stock for an average price of $16. MillerKnoll is currently selling at $23.20 per share.

Herbalife Nutrition (HLF)

• Active Corporate Insiders: 4

• One-Year Performance: -61.40%

• Total Bought Back: $481,000

This is likely the most controversial company on the list and is also known as the company that brought down “Baby Buffett.” Herbalife became famous in the world of business and finance as legendary investor Bill Ackman was forced to admit defeat after an epic five-year-long feud with the seasoned Carl Icahn. He opened a giant short position on Herbalife, criticizing it for its controversial business approach and going as far as calling it a pyramid scheme and a fraud. Herbalife has been one of the rare companies that thrived during the pandemic, as the lockdown measures taken by governments around the world led to a stark rise in unemployment rates, ultimately allowing Herbalife’s business model to flourish. Ever since, the firm seems to have been headed in a downward spiral, managing to lose more than 60% of its value in the last year alone. This led to a quite interesting valuation, as the market currently values Herbalife at an NTM EV/EBITDA of 6.82x, an NTM P/E of 5.64x, and an NTM MC/FCF of 8.23x. Insider confidence was strong all along throughout the crisis, and this quarter was no exception. Insiders including CEO Michael Johnson, EVP Michael Wang, and Directors John Tartol and Alan LeFevre bought together some 34,000 shares. They bought more than $481 thousand worth of HLF shares in the $12.00-13.00 range. Seeking Alpha Authors rate the company as a “Hold”, with an average score of 3.00/5.00. Wall Street Analysts on the other end do not share the same sentiment and have assigned HLF a “Buy” rating with an average score of 3.75/5.00. The company is currently selling at $16.69 per share.

Paramount Group (PGRE)

• Active Corporate Insiders: 2

• One-Year Performance: -37.40%

• Total Bought Back: $495,000

Paramount Group will be the only real estate investment trust on our small-cap list today. It is a REIT that specializes in the development of commercial, residential, and mixed-use properties. PGRE owns and operates a portfolio of mostly “Class A” office properties that are located in attractive markets such as New York City and San Francisco. We are discussing a highly concentrated portfolio of 14 million square feet and 19 premium properties across those regions. The office REIT, like many others, has recently been crushed in the market due to similar issues surrounding hybrid work and long-term-oriented demand. As a matter of fact, the company never truly recovered or came close to its pre-2020 crash prices. The REIT generated a negative 37.40% one-year return. The New York-based REIT is currently being sold for an FWD P/FFO of 6.11x, which is far below the sector’s average and constitutes a very enticing value proposition. The offer is sweetened by an attractive dividend yield of 5.19%. However, this value is not recognized by analysts, as the overall consensus lands the company in the “Hold” region. Both Seeking Alpha Authors as well as Wall Street Analysts share this view, with the first rating group rating PGRE with an average score of 3.00/5.00, and the latter with an even worse score of 2.71/5.00. In the fourth quarter, CEO Albert Behler and Director Thomas Armbrust bought 90,000 shares, or approximately $495 thousand of PGRE stock. The O-REIT is currently selling at $6.01 per share.

Closing arguments

Last year will not go down as a fond memory for the vast majority of investors, as it marked the end of a 13-year-long bull market that witnessed fortunes being built. With discussions about a possible year-long recession, no one truly knows if the market indexes are headed for new highs or if the pain is only going to further intensify as we move forward into the new year. However, the rally that began in the third quarter of 2022 is still holding strong at the time of writing, with the S&P 500 (SPY) up 7.38% year to date. The shift in investor sentiment is noticeable. It is also interesting to reflect on our earlier third-quarter small-caps article, which saw three out of five candidates significantly outperform the market during that time. This includes PROG Holdings (PRG), Ranpak (PACK), and Jeld-Wen (JELD). This installment of quick picks brings you new small-cap stocks that also enjoyed a period of remarkable attention from their corporate insiders, which could potentially lead to similar results and are henceforth possibly worthy of further research.