Editor’s Note: Related Tickers: Fastenal Company (NASDAQ:FAST), The Cheesecake Factory Incorporated (NASDAQ:CAKE), Texas Industries, Inc. (NYSE:TXI), Windstream Corporation (NASDAQ:WIN), NewMarket Corporation (NYSE:NEU)
Studies show that stocks bought by insiders outperform the market, with multiple insider purchases being a particularly strong bullish signal at least on average (read our analysis of studies on consensus insider purchases). We think that this is because insiders already have a tight economic connection to the company, and so buying more shares- which reduces their diversification and thus runs against general economic theory- should generally indicate more confidence than usual in the stock’s prospects. Of course, insiders aren’t always correct and we have noticed that many stocks that even multiple insiders have been buying have large bearish communities. Here are five stocks which multiple insiders have bought in the last three months but also have high short interest as of the most recent data:
Two Board members at Fastenal Company (NASDAQ:FAST), a $14 billion market cap provider of bolts, nuts, screws, and other hardware supplies, were buying the stock in mid February at prices of above $50 per share. The stock is currently trading below that level following an announced revenue miss from the first quarter of 2013. The short ratio is more than 12, and Fastenal Company (NASDAQ:FAST)’s earnings multiples are quite high- the forward P/E, for example, is 26. Billionaire Steve Cohen’s SAC Capital Advisors was buying shares in the fourth quarter of 2012, closing December with 1.1 million shares in its portfolio (see Cohen’s stock picks).
The Cheesecake Factory Incorporated (NASDAQ:CAKE) has also been bought by multiple insiders in the last three months. The table service restaurant is coming off a bad Q4, when net income fell 26% versus a year earlier as sales were off slightly. At 21 times trailing earnings the stock is actually priced for moderate growth, so we can understand why shorts are interested in the stock. Billionaire Mario Gabelli’s GAMCO Investors reported a position of 1.1 million shares at the end of December, though it was the only fund we track in our database of 13F filings to have more than $15 million invested in the company (find Gabelli’s favorite stocks).
Insiders have been buying stock in $1.7 billion market cap cement company Texas Industries, Inc. (NYSE:TXI). Optimism about the housing market and construction in general has been good for cement stocks, and Texas Industries is up 76% in the last year. However, the sell-side is expecting earnings to be poor over the next couple years with the company barely earning any profits in the fiscal year ending in May 2014. Over 30% of the float is held short as a result. Southeastern Asset Management is a major shareholder, reporting ownership of 8.2 million shares at the end of 2012.
Multiple insiders have been buying shares of telecom company Windstream Corporation (NASDAQ:WIN) with several purchases taking place in late March. See a history of insider purchases at Windstream. 12% of Windstream’s float is held short, which actually reflects an impressive amount of commitment on the part of short sellers given that the dividend yield is over 10% at current prices and recent dividend payments (the stock has fallen 25% in the last year). In terms of earnings the value situation is questionable, though the EV/EBITDA multiple is a more reasonable 6.1x so the valuation is a bit more understandable in terms of cash flow.
At the end of January two of NewMarket Corporation (NYSE:NEU)’s Board members bought shares of the petroleum additives company. At a market capitalization of $3.7 billion, NewMarket carries trailing and forward P/Es of 15 and 14, respectively, placing it at least close to value territory. In its most recent quarterly report net income rose strongly compared to the fourth quarter of 2011, though revenue growth was more modest. 13% of the float is held short. D.E. Shaw, a large hedge fund managed by billionaire David Shaw, disclosed ownership of about 210,000 shares (check out more stocks D.E. Shaw owns).
Disclosure: I own no shares of any stocks mentioned in this article.
