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Insider Trading Activity that May Create Short-Selling Opportunities

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There are no doubts that the U.S. economy has great fundamentals at the moment, but it seems that a global economic slowdown somewhat hampers the nation’s economic growth. A recent report reveals that the U.S. trade deficit increased by nearly 16% in August, primarily as a result of a strong U.S. dollar. At the same time, it is highly likely that most global companies have felt the impact of the strengthening greenback as well, which will be reflected in their earnings reports. It is also worth pointing out that analysts expect third-quarter earnings to decline for the second straight quarter, which may put some weight on U.S. equities. Having this in mind, we will now refocus our discussion on three companies that have seen their insiders sell stock lately, in an attempt to find potential candidates for short-selling. The following article will explore the insider selling activity at Cooper Companies Inc. (NYSE:COO), Steelcase Inc. (NYSE:SCS), and Hormel Foods Corp. (NYSE:HRL). However, one should keep in mind that insider selling may occur for numerous reasons irrelevant to companies’ prospects, so a thorough check up should be conducted prior to jumping into the market.

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Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 118% over the ensuing 36 months, outperforming the S&P 500 Index by nearly 61 percentage points (read more details here). The trick is focusing only on the best small-cap ideas of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.

Let’s begin our analysis with the medical device company Cooper Companies Inc. (NYSE:COO), which has seen its stock drop by 18% over the past three months. Allan E. Rubenstein, Vice Chairman and Lead Director, reported selling 294 shares at a price of $150 per unit, reducing his holding to 7,269 shares. A little more than two weeks ago, the insider unloaded an additional 750 shares at prices ranging from $157 to $158. The company released its fiscal third quarter earnings report on September 3, which caused a major sell-off in its shares. Apparently, the broader market pullback in August and the seemingly disappointing financial results stand behind the company’s poor stock performance. Cooper Companies reported revenue of $461.7 million for the third quarter, ended July 31, down by 7% year-over-year. However, its GAAP earnings per share (EPS) dropped by 49% year-over-year to $0.91. Hence, it seems that the Director is cashing out a portion of his stake so as to avoid a further downturn. Samuel Isaly’s Orbimed Advisors is bullish on Cooper Companies Inc. (NYSE:COO), holding 1.3 million shares as of June 30.

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