Generally, corporate insiders tend to know more about their companies’ prospects than anyone else. Therefore, seasoned investors might eventually get a sense of the prospects of different companies by tracking the trading activity of corporate insiders. In the following article we’ll be discussing four companies that have seen unusual insider trading activity recently, which might signal potential opportunities. Mead Johnson Nutrition Company (NYSE:MJN) and LendingClub Corporation (NYSE:LC) are two companies that had a large volume of insider buying yesterday, whereas Google Inc. (NASDAQ:GOOG) and Electronic Arts Inc. (NASDAQ:EA) have seen strong insider selling activity recently.
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 123% over the ensuing 32 months, outperforming the S&P 500 Index by nearly 66 percentage points (read more details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
Let’s begin by looking at Mead Johnson Nutrition Company (NYSE:MJN), which saw an insider buy its stock yesterday. Howard B. Bernick, an independent director of Mead Johnson Nutrition, purchased 5,000 shares at $79.95 apiece, for a total price of $399,750. Following the transaction, the director currently owns 43,332 shares. This insider acquisition could suggest that the stock, which has lost nearly 21% year-to-date, is in a bottoming-out phase at the moment. Just recently, Mead Johnson Nutrition has agreed to pay $12.03 million to settle Securities and Exchange Commission allegations that its China-based unit paid healthcare professionals to recommend its baby formula. Furthermore, the company has reduced its sales and profit outlook for 2015, as a result of the slowing Chinese economy. James Dinan’s York Capital Management remains bullish on Mead Johnson Nutrition Company (NYSE:MJN), boosting its stake to 2.70 million shares during the second quarter.
LendingClub Corporation (NYSE:LC) is the other company that saw insider buying activity on Thursday, as its founder and CEO Renaud Laplanche bought 50,000 shares at $12.55 per unit, increasing his stake to 4.47 million shares. It might be the case that Mr. Laplanche believes the stock is undervalued at the moment, considering that it has dropped by more than a half since the beginning of the year. Some analysts believe that LendingClub is still in the early stages of its organizational life cycle, suggesting that the company is transitioning from growth to profitability. LendingClub, the online marketplace connecting borrowers and investors, has recently launched Lending Club Open Integration (LCOI), which enables online advisors and broker-dealers to offer Lending Club investments quickly to their client bases. David Gallo’s Valinor Management is the largest shareholder of LendingClub Corporation (NYSE:LC) within our database, owning 14.40 million shares.