Insider Trading Activity that May Create Short-Selling Opportunities

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.

Moving on to Steelcase Inc. (NYSE:SCS), whose President and Chief Executive Officer James P. Keane sold 50,000 shares earlier this week at prices in the range of $18.91-to – $19.12. After this sizable sale, the executive currently owns 620,702 shares. Ignoring the numerous ups and downs experienced by Steelcase’s stock throughout this year, one can say that it has delivered a relatively weak performance so far, as it has inched up by 4% year-to-date despite facing two major pullbacks. Just a few weeks ago, the manufacturer of furniture settings, user-centered technologies, and interior architectural produces, reported better-than-expected financial results for the second quarter. Even though Steelcase experienced setbacks in its European operations, the company still managed to deliver earnings growth of 6.7% year-over-year, thanks to the strong Americas business. The company posted revenue of $819.0 million and diluted earnings per share of $0.30, compared to $786.7 million and $0.24 reported a year ago. Royce & Associates, founded by Chuck Royce, reported owning 1.78 million shares of Steelcase Inc. (NYSE:SCS) in the last round of 13F filings.

Last but not least, let’s examine the insider sales at Hormel Foods Corp. (NYSE:HRL). Executive Vice President Steven G. Binder reported the sale of 10,000 shares at a price of $64.85 apiece, all of which were held by Spouse’s Revocable Trust. Following the transactions, the trust fund owns 61,867 shares. The executive also holds a direct ownership stake of 5,727 shares, along with an additional 95,000 shares held indirectly. The shares of Hormel have had a great performance over the past five years or so, returning more than 183% over this period. This year has not been bad either, considering that the stock has advanced 22% year-to-date and is currently trading near an all-time high. Therefore, it is no surprise that Binder’s trust is cashing out a portion of its holdings. It is not entirely clear who stands behind this decision, but it appears to be the right one given the current state in equity markets. Joel Greenblatt’s Gotham Asset Management added a 1.16 million-share position in Hormel Foods Corp. (NYSE:HRL) during the June quarter.

Disclosure: None