David Miller: As we approach the end of 2014, corporate insiders are buying in a similar manner to what we saw from 2012 going into 2013, before the market rally. This includes a recent pickup in insider buying in a number of companies where corporate insiders made well-timed purchases but then stayed on the sidelines throughout most of 2014, including: Boston Scientific (BSX), Valeant Pharmaceuticals (VRX) and Keurig Green Mountain (GMCR). This type of buying suggests that these stocks may be positioned for a strong 2015. Additionally, corporate insiders in energy companies are taking advantage of potentially great buying opportunities in companies like Phillips 66 (PSX), Chesapeake Energy (CHK) and Energy Transfer Equity LP (ETE).

MutualFunds.com: In looking at your own strategy, how do you decide when value is to be had? For example, the energy space has been hit hard, especially in recent months. How do you determine when insider buying in a falling stock price makes sense for the fund to deploy capital into?

David Miller: When evaluating corporate insider activity, we analyze the number of insiders buying, the amount of stock they are buying, their position within the company and their past track record of how well they’ve timed the highs and lows of their stocks. Whether a stock price is rising or falling, we look to the best insider activity to determine if a stock is a good investment. For example, OvaScience (OVAS) experienced insider buying at all-time highs, and the stock doubled after that activity.

MutualFunds.com: On the flip side, when do you determine insider selling could be a red flag for investors?

David Miller: Corporate insiders sell for a number of reasons. In certain companies, like technology companies where corporate insiders tend to have a lot of their wealth tied up in their own company stock, regular selling is common. We seek out situations where the corporate insiders are selling in a very significant and unusual manner. Furthermore, extreme insider selling can be a telling signal when a stock trades at extreme valuations, is falling in price, and the insiders continue to sell as the price drops. Zynga (ZNGA) is an example where insiders unloaded around $12 and the stock now trades below $3.

MutualFunds.com: The Catalyst SmallCap Insider Buying Fund (CTVAX) has lagged a bit in 2014. Any specific reasons for the underperformance?

David Miller: We stress the need to view the Small-Cap Insider Buying Fund (CTVAX) as a long-term investment. Corporate insider buying signals are typically the most meaningful in very small companies with limited analyst coverage. This has led us to invest in some of the best performing stocks of 2014, such as OvaScience (OVAS). However, in a risk-off environment, the market may sell off a number of good companies just because they want to reduce exposure to smaller companies, regardless if the company is a good investment. In particular, the market heavily sold smaller energy and materials stocks. OPEC’s price war will likely impact some smaller energy stocks over the long-run, but many of the smaller energy stocks we own have provided numerous positive updates about their ability to weather the current environment and position themselves well for the recovery in crude oil prices. The fact that these insiders continue to buy these stocks gives us confidence for a potentially strong 2015.

MutualFunds.com: Do you perform a different due diligence when it comes to analyzing smaller cap companies?

David Miller: We actively monitor every stock in which we invest, regardless of market capitalization. Our philosophy requires us to limit our own bias about a stock or industry and instead look to the people that know the most about that company or industry, the corporate insiders. There have been a number of occasions where the market hated a stock, GMCR for example, which then announced news that nobody could have predicted leading to a huge gain for our strategy. We are constantly reviewing patterns of insider activity, especially in regards to rapidly changing market conditions and other exogenous risks.

MutualFunds.com: What are the main themes investors should pay attention to as we head into 2015?

David Miller: Current trends in insider buying suggest that 2015 may be another great year for equities. As the U.S. economy continues to improve, we recommend that investors look to opportunities within the small-cap space that are leveraged to the U.S. economy and have limited exposure to struggling economies in Europe, Asia and emerging markets. These companies also have less exposure to a strengthening U.S. dollar.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of MutualFunds.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.