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Insiders Are Buying These Stocks, Shorts Are Selling, Who’s Right?

We like to follow insider purchasing activity as it tends to be a bullish sign for a stock. However, investors cannot purchase every stock that an insider likes, or even investigate them in depth. We decided to take a look at stocks bought by insiders which are also seeing high activity from short sellers. Using data from Fidelity on shares short as a percentage of shares outstanding, and our own records of insider purchases, here are five stocks with at least 20% of their outstanding shares held short that have seen insider buying in the last three months:

David Einhorn

David Einhorn’s foes managing Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) have started putting their money where their mouth is: several insiders bought the stock, which is down 73% in the last 52 weeks, in August. Einhorn, likely in reference to Green Mountain, had joked at this month’s Value Investing Congress that a stock down 90% is “a stock that was down 80% and then got cut in half” and reaffirmed his short position. See some of Einhorn’s long positions from the end of June. With about 29% of shares outstanding held short, he seems to have a good deal of company. We aren’t confident enough in Green Mountain to recommend buying yet.

United States Steel Corporation (NYSE:X) is down 8% in the last year but a number of short sellers apparently believe that the company’s 55% drop in net income in its most recent quarter versus a year earlier warrants a larger decline: the most recent data shows about 27% of shares outstanding held short. Murry Gerber, a Board member at the company as well as at other large corporations such as Blackrock and Halliburton, disagreed with this sentiment and purchased shares in August. Research his past transactions at companies where he served on the Board. Unprofitable, though trailing at 10 times forward earnings estimates, we would want more good news from the company before buying here as well.

Billionaire Elon Musk’s trust recently bought 35,400 shares of Tesla Motors Inc (NASDAQ:TSLA), where Musk serves as CEO. Read our analysis of the transaction and of Tesla Motors. Tesla’s electric cars have excited investors- the stock is up 50% from the IPO price- but the business has not been doing well recently. As a result, about 27% of shares outstanding were held short as of the most recent report on short interest. We had been skeptical of the company’s prospects as growth had been negative and Tesla itself had been unprofitable. It is possible that another auto company would acquire Tesla, but they have their own electric-only offerings (not to mention that many auto companies are not even in a position to make acquisitions).

Multiple insiders have been buying at J.C. Penney Company, Inc. (NYSE:JCP), which currently sits at a $5.6 billion market cap despite having negative trailing earnings (it is expected to earn $1.33 per share in the fiscal year ending in January 2014, implying a forward P/E of 19). 26% of the shares outstanding are held short as market participants doubt that that earnings trajectory justifies the current stock price. We think the shorts are right here, particularly if an investor can pair a short position in JC Penney with a long position in a better-positioned retailer including Wal-Mart or Target.

USG Corporation (NYSE:USG) is another stock where insiders and shorts are in disagreement. 20% of the shares outstanding were held short as of the most recent report; in August a Board member bought 4,000 shares of the stock. Unlike some of the other stocks on this list, the manufacturer of gypsum products and other building materials has been on a roll: its stock is up 167% in the last year. However, it is unprofitable and analyst expectations are for it to be barely profitable next year. We think there are better buys in the building materials and construction theme.

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