Although much research concludes that securities purchases on the part of insiders tend to beat broader market benchmarks by a wide margin, there is little fresh evidence showing that investors are able to profit from mimicking insiders’ moves. However, insider trading behavior can serve as an additional tool in one’s security analysis process; an indicator that can be used to support larger investment theses. Instead of blindly mimicking each insider purchase, retail investors should focus on pairing insider trading activity with a general thesis, which may involve bottom-line improvement, activist pressure, or the possibility of a takeover. At the same time, investors can use heavy insider buying, particularly clusters of buying, as a stock selection procedure, which simply means that companies witnessing noteworthy insider buying represent strong possible investment candidates that should be researched further. With that in mind, the following article will discuss several noteworthy insider purchases reported with the SEC on Tuesday.
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 Struggling Hard Drive Maker’s CEO Buys a Sizable Block of Shares
According to a fresh Form 4 filing, Seagate Technology PLC (NASDAQ:STX)’s Chairman and Chief Executive Officer, Stephen J. Luczo, purchased 200,000 shares on Tuesday at prices varying from $19.74 to $20.29 per share, all of which are held by the Stephen J Luczo Revocable Trust. After the recent sizable purchase, the trust fund continues to hold an ownership stake of 1.83 million shares.
The aforementioned purchase comes shortly after the hard drive maker revealed disappointing financial results for the third quarter of fiscal year 2016 ended April 1, which sent the stock down by 26% in the past five days. The stock is 46% in the red thus far in 2016 and is trading only slightly above its 52-week low of $19.30 reached on Tuesday. The Dublin-based company also provided a disappointing outlook for the foreseeable future, suggesting that the previously-anticipated small recovery in PC sales might have been incorrect. Shortly after Seagate Technology PLC (NASDAQ:STX) revealed its earnings report, analysts at JPMorgan downgraded the computer hard drive manufacturer to ‘Underweight’ from ‘Neutral’ and trimmed its price target on the company’s stock to $15 from $30, citing “structural weakness in end-market demand” due to lower demand for PCs and increased adoption of flash storage at the expense of hard disk drives. Moreover, JPMorgan believes Seagate’s current quarterly dividend of $0.63 per share is unsustainable if bearing in mind its earnings prospects. Similarly, analysts at RBC Capital Markets downgraded Seagate to ‘Sector Perform’ from ‘Outperform’ and cut their price target on the stock to $24 from $36, also claiming that the current dividend may not be sustainable.
Seagate’s shares are currently changing hands at around 7.8-times expected earnings, significantly below the forward P/E multiple of 11.1 for the technology hardware, storage and peripherals sector. David Harding’s Winton Capital Management owned 2.66 million shares of Seagate Technology PLC (NASDAQ:STX) at the end of December.