I am a great believer in corporate insiders’ ability to outperform broader market benchmarks and I am not the only one in this camp. Insider trading watchers know that insiders tend to act as contrarian investors, which means that they will buy low and sell high, the core tenets of successful investing, yet ones often not properly utilized by the average investor, who tends to go along with the market rather than against it. Of course, the timing of insider sales or purchases does not always precisely pinpoint the turnaround point of a company’s stock performance, but strong shifts in insider trading behavior might represent strong indicators of future stock performance. Past research also suggests that non-insiders can capitalize on insiders’ highly-successful ability to trade shares, so it does pay off to keep a close eye on insider trading. Nonetheless, insider trading fans should still remember that corporate insiders do have their own biases, so they are also prone to making mistakes when trading. For that reason, retail investors should mostly look for clusters of insider buying. The Insider Monkey team has revealed and discussed numerous such clusters of insider buying at various companies over the past several months, with our almost-daily insider trading articles frequently revealing possible investment opportunities. We have processed a bunch of Form 4 filings submitted with the SEC on Monday and identified three more companies that have witnessed interesting insider trading activity on the buy side.
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 imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).
Let’s begin our so-called legal insider trading investigation by analyzing the insider buying registered at Newell Rubbermaid Inc. (NYSE:NWL). Executive Vice President Mark S. Tarchetti purchased 12,380 shares on Friday through multiple transactions at prices that ranged from $40.75 to $40.78 per share, which lifted his overall holding to 176,559 shares. Newell Rubbermaid is a distributor of consumer and commercial products marketed under a wide portfolio of brands such as Sharpie, Paper Mate, Expo, and Mr. Sketch, to name just a few. In December 2015, Newell Rubbermaid Inc. (NYSE:NWL) announced that it had agreed to acquire Jarden Corp (NYSE:JAH), a global consumer products company that markets a wide portfolio of consumer products in three business lines: Branded Consumables, Consumer Solutions, and Outdoor Solutions. Under the terms of the freshly-inked merger deal, Jarden shareholders will receive 0.862 shares of Newell and $21.00 in cash for each share of Jarden. The management of Newell Rubbermaid anticipates that the soon-to-be combined company will be able to achieve cost synergies of $500 million over the next four years. However, some analysts believe that the multi-billion-dollar merger may destroy some shareholder value, considering the low profitability of the two companies relative to other peers in the industry. Even so, the management of Newell Rubbermaid expects the deal to accelerate growth and expand margins, thus submerging analysts’ concerns over the success of the deal and its benefits.
One could interpret the recent insider buying at Newell Rubbermaid as a sign of management’s confidence in the future of the post-merger company. The aforementioned stock-and-cash merger is anticipated to close in the second quarter of 2016. Shares of Newell Rubbermaid are 6% in the red year-to-date and trade at 16.7-times expected earnings, compared to the forward P/E multiple of 16.6 for competitor Avery Dennison Corp (NYSE:AVY) and the ratio of 12.55 for Tupperware Brands Corporation (NYSE:TUP). There were 28 hedge funds in our system with stakes in the company at the end of December 2015, which had accumulated nearly 8% of its outstanding common stock. Lee Ainslie’s Maverick Capital acquired a new stake of 4.17 million shares in Newell Rubbermaid Inc. (NYSE:NWL) during the December quarter.