Market Overview

Insiders Of This Microcap Send A Strong Buy Signal

Insiders Of This Microcap Send A Strong Buy Signal

A director of Sonic Foundry (NASDAQ: SOFO) bought $181,000 of stock in July and August for an average price of $8.70, resulting in a 16.55 percent return in roughly 7.5 months (28 percent annualized). A series of insider purchases are sending another buy signal.

Academic research has shown that companies with insider purchases far outperform the market. A 2002 study from Boston University, Wharton, and Harvard showed that insiders outperformed the market by an average of 11.2 percent per year with their purchases; the average return on small-cap stocks is even higher.

Four directors and the CEO of Sonic Foundry purchased shares last week for a total value of $118,000 (the company has a market cap of just 42.91 million.) This is on top of $108,000 worth of purchases in February. Although some investors discount automatic purchases (roughly half of shares purchased were automatic), insiders would not have set them up if they weren't optimistic on the company’s future. In addition, a loophole in the SEC’s Rule 10b5-1 allows persons with inside information to cancel planned trades before they take place without penalty.

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This is also encouraging for an S-3 was filed on Tuesday, March 11, registering $2,153,889 of stock from which the company will receive no proceeds. The purchases show that insiders think shares are undervalued despite the potential dilution.

The purchases come after shares have been battered down from 2010, when operating income for fiscal year 2011 was $806,000 versus a $638,000 loss for fiscal year 2013. The loss in profitability can be largely attributed to rising SG&A expenses, as revenue has risen 12.64 percent.

Sonic Foundry offers a webcasting platform used by higher education, businesses and government to capture presentations and enhance communication. IBISWorld expects the educational support industry to grow by 6.5, 6.2, and 5.7 percent for the next three years versus 2.5, 3.2, and 3.9 percent for the US GDP. IBISWorld writes, “While tighter state budgets will limit unnecessary expenditure, an underlying level of demand for support services will remain,” and that a push to expand educational funding by the Obama administration is also a strong sign.

Despite a 6.28 percent drop Tuesday after the S-3 filing, shares are still up 4.32 percent year-to-date versus the Powershare Microcap ETF (NYSE: PZI) up 3.14 percent. Sonic Foundry last traded at $10.14.


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