Corporate insiders usually have two ways to buy or sell shares in their own companies. The first way is to buy or sell shares on the open market, while the second one is to conduct transactions under pre-arranged trading plans known as 10b5-1 plans. Most U.S. public companies have established trading windows for their insiders, which specify particular time periods when directors and executives can buy or sell shares in their own companies. Moreover, many companies appear to have blackout and quiet periods in place, so insider trading activity is extremely sluggish during earnings seasons. However, insider transactions conducted under pre-arranged trading plans are not affected by blackout or quiet periods, which seems to explain why the ratio of insider selling over insider buying is extremely high during earnings-heavy periods (insiders tend to sell shares by designing 10b5-1 plans and buy shares on the open market). With that in mind, let’s proceed with the discussion of spur-of-the-moment insider selling activity, which relates to the type of insider selling that is not conducted under trading plans, recently witnessed at three companies.
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).
This Home and Security Products Company Had Two Executives Sell Shares Lately
Fortune Brands Home & Security Inc. (NYSE:FBHS) has seen two top-tier executives unload shares in the past several days. To begin with, David Randich, President of MasterBrand Cabinets, sold 29,591 shares on Monday at prices that ranged from $57.00 to $57.42 per share, cutting his holding to 118,887 shares. Moreover, Chief Executive Officer Christopher J. Klein dumped 310,000 shares on Friday at prices varying from $57.00 to $58.09 per unit, after exercising 230,000 stock options at an exercise price of $12.30. After these transactions, Mr. Klein currently holds a direct ownership stake of 389,308 shares. The CEO sold an additional 80,000 shares on Friday at a weighted average price of $57.04, all of which were owned by trusts held for the benefit of Mr. Klein’s heirs.
The shares of the home and security products company are trading near their all-time high of $59.98 reached last week, after gaining 25% in the past 12 months. The aforementioned insider transaction comes shortly after Fortune Brands Home & Security Inc. (NYSE:FBHS) released its first-quarter earnings report, which revealed earnings per share (EPS) of $0.35 on net sales of $1.11 billion. This compares to EPS of $0.25 on net sales of $950.8 million reported for the same quarter of the prior year. Meanwhile, the management anticipates full-year 2016 sales growth in the range of 10% to 12%, primarily driven by the acquisition of manufacturer of kitchen and bathroom cabinetry Norcraft for $648.6 million in May 2015.
Several days before the release of the earnings report, analysts at Keybanc reiterated the ‘Overweight’ rating on Fortune Brands Home & Security and increased the price target to $64 from $56, citing “rising homeowners’ equity and increased ability to extract value from price-appreciated homes”. Murray Stahl’s Horizon Asset Management cut its stake in Fortune Brands Home & Security Inc. (NYSE:FBHS) by 14% during the March quarter to 33,604 shares.