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.
Moving on to the companies that have seen insider selling activity recently. Google Inc. (NASDAQ:GOOG) had one of its co-founders selling shares, as Larry Page reported selling 16,166 Class A shares and 16,164 Class C shares on August 20, remaining with 75,000 Class A shares and 21.83 million Class C shares. Moreover, Mr. Page has been selling shares for the last couple of weeks. Google is currently in the process of pursuing an overhaul of its corporate structure and will soon become a new holding company called Alphabet, which will be under the stewardship of CEO Larry Page. As a result, each current shareholder of Google will get one Alphabet share for each share previously-owned. Andreas Halvorsen’s Viking Global reported owning 2.74 million Class A shares and 1.15 million Class C shares of Google in its most recent 13F filing.
Finally, Electronic Arts Inc. (NASDAQ:EA), an American developer of video games, has also seen strong insider selling activity lately. Gabrielle Toledano, the executive vice president and chief talent officer of Electronic Arts, sold 3,511 shares in multiple transactions on August 20 at prices between $68.24 and $70.92. Subsequently, Mr. Toledano currently owns 108,269 shares. The stock of Electronic Arts has gained over 40% this year, and it seems that the company’s insiders are cashing out their positions. However, the holiday season, which is the most flourishing quarter for the gaming industry, is still ahead. Moreover, analysts at PricewaterhouseCoopers have recently suggested that the gaming industry will keep growing at least by the end the decade. Specifically, the analysts anticipate that the global gaming revenue will increase by 5.8% per year until 2019. From the pool of hedge funds that we track, Philippe Laffont’s Coatue Management is the largest shareholder of Electronic Arts Inc. (NASDAQ:EA) with a stake of 5.75 million shares.
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