Insiders made noteworthy buys (see definition below) in six consumer sector (including services) stocks this past week (May 21st to 25th, 2012), and sold four others. These were selected based on a review of over 1,600 separate SEC Form 4 (insider trading) filings last week, as part of our daily and weekly coverage of insider trades. The filings are noteworthy based on the dollar amount sold, the number of insiders buying or selling, and based on whether the overall buying or selling represents a strong pick-up based on historical buying and selling in the stock (for more info on how to interpret insider trades, please refer to the end of this article):
Sturm Ruger & Co. Inc. (RGR): RGR is a leading manufacturer of firearms in the U.S., including pistols, revolvers, rifles and shotguns in the U.S., primarily for the commercial sporting market. On Wednesday, Director John Cosentino filed SEC Form 4 indicating that he purchased 15,000 shares for $0.59 million, ending with 48,946 shares after the purchase. Insider buying is unusual at RGR, and in fact, this is the only purchase by insiders at least in the last two years.
RGR shares, in a strong uptrend since bottoming in the $5 range in early 2009, took off like a rocket this year, and are up about 22% YTD at its $40.83 close on Friday, after topping out earlier in May at $58.42. Earlier, in March, the company revealed a problem that most others would kill to have, namely that their Q1 (March) bookings were so strong that they had temporarily suspended accepting orders.
In its Q1 results released four weeks ago, on May 1st, RGR handily beat analyst revenue and earnings estimates (79c v/s 68c). However, shares took a dive after the Q1 report, in what has become more than just a consolidation move, and are attractively priced here at 16.7 P/E on a TTM (trailing-twelve-month) basis and 5.2 P/B compared to averages of 22.7 and 1.4 for its peers in the leisure and recreation products group, while earnings are projected to rise at an 18.0% annual rate from $2.09 in 2011 to $2.91 in 2013. In comparison, its primary publicly traded competitor Smith & Wesson Holding Corp. (SWHC), trades at a current 28.7 P/E and 4.5 P/B, while earnings at SWHC are projected to rise from 17c in 2011 to 50c in 2013.
Besides RGR, insiders also made purchases in the following five consumer stocks, the first three of which like RGR are also projected to grow their earnings at a very high rate over the next two years:
- JetBlue Airways Corp. (JBLU), which provides passenger airline service to 63 destinations in 21 states, Puerto Rico, and Mexico, and 10 countries in the Caribbean and Latin America, in which Director Peter Boneparth purchased 50,000 shares for $0.21 million, the only insider purchase at least in the last two years;
- Southwest Airlines Co. (LUV), which provides predominantly short-haul, high-frequency, point-to-point, low-fare domestic airline service to 69 cities in 35 states, in which Director William Cunningham purchased 10,000 shares for $82,300, in comparison to insiders purchasing 15,000 shares in the past two years;
- Visteon Corp. (VC), that manufactures climate control systems, cockpit modules and chassis products to automotive OEMs, in which Director Duncan Cocroft purchased 1,000 shares for $41,740, the only insider purchase in the past year; and
- Mead Johnson Nutrition (MJN), which manufactures infant formula and children's nutritional products for sale in Asia, Europe, Latin America and North America, in which two insiders filed SEC Forms 4 indicating that they purchased 10,100 shares for $0.82 million, in comparison to insiders purchasing 23,300 shares in the past year;
- Omega Protein Corp. (OME), which manufactures fish meal and fish oil products used in animal feed, food products and dietary supplements, in which two insiders filed SEC Forms 4 indicating that they purchased 3,500 shares for $22,895, in comparison to 20,845 shares purchased by insiders in the past two years.
On top of these, insiders also reported noteworthy sales last week in the consumer sector in:
- Monster Beverage Corp. (MNST), a marketer and distributor of alternative beverages including energy drinks, fruit juices, smoothies and natural sodas, in which two insiders filed SEC Forms 4 indicating that they sold 600,000 shares for $42.3 million, in comparison to 2.30 million shares sold by insiders in the past year;
- The Hershey Company (HSY), one of the world's most well-recognized chocolate brands, and a leading snack food company that manufactures chocolate and confectionery products, pantry items, and gum and mint refreshment products worldwide, in which three insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 122,229 shares for $8.3 million, in comparison to 0.55 million shares sold by insiders in the past year;
- PepsiCo Inc. (PEP), the world's leading manufacturer of foods, snacks, and carbonated and non-carbonated beverages, in which CEO of PepsiCo Europe Zein Abdalla filed SEC Form 4 indicating that he exercised options and sold the resulting 66,488 shares for $4.5 million, in comparison to 0.95 million shares sold by insiders in the past year; and
- premium apparel, accessories, fragrances, and home furnishings provider Ralph Lauren Corp. (RL), in which Chairman & CEO Ralph Lauren filed SEC Form 4 indicating that he exercised options and sold the resulting 12,500 shares for $1.8 million, in comparison to 0.18 million shares sold by insiders in the past year.
General Discussion on Insider Trading
The reports in this series identify last week's insider trades of noteworthy significance by sector or industry group, either by virtue of their timing, their size, the number of insiders buying or selling, based on who is buying or selling, or by the trend of their buys and sales over the long-term.
What is Insider Trading?: Insider trading as defined here (and by the SEC) includes not just corporate insiders such as company executives and key employees, but also directors and large shareholders that have access to non-public information. Large shareholders are defined by the SEC for this purpose are those that having beneficial ownership of ten percent of more of the firm's equity securities (including institutional investors). Also, in the U.S., "insiders" are not just limited to corporate officials and major shareholders, but also when a corporate insider "tips" a friend about material non-public information, the duty the corporate insider owes the company is now imputed to the friend who is now in violation of a duty to the company if he or she trades on the basis of that information. The U.S. is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them.
While most insider trading is legal, the term is commonly used to refer to the illegal kind when a corporate insider trades based on material non-public information that can have an effect on the company's share price. By law, insiders are prohibited from trading based on nonpublic information, but most believe that such trading does occur around the edges. The thinking goes that corporate insiders, because of their access, have the most up-to-date information on the health of their companies and the industries they operate in. Investors, as a result, can benefit from the timely knowledge of insider transactions. In fact, one University of Michigan study found that when executives bought shares in their own companies, the stocks tended to outperform the total market by 8.9% over the next 12 months. Conversely, when they sold shares, the stock underperformed by 5.4%.
Timeliness of Information: Like in the 13-D and 13-G filings for Institutions, the SEC Forms 3 and 4 on insider filings are extremely timely, and hence of greater significance, as they must be reported within two business days of the trade.
Insider Buying More Informative than Selling: As a rule, insider buys are more informative than sells. This is because insiders sell often, and they sell for a variety of reasons that may be completely unrelated to the health of the company, including, for example, to diversity their holdings or to pay for an upcoming personal expense. In contrast, insider buying is relatively uncommon, and since they have an exclusive window into their own company's performance, it is reasonable to presume that they probably have good reasons based on information at their disposal when they are risking their own assets to buy company stock.
Regular and Automatic Trades: Insider trades maybe regular trades, or they may be automatic trades made under SEC Rule 10b5-1. It is generally believed that regular insider share purchases and sales carry more predictive value as they are made voluntarily by the insiders. Conversely, trades made under SEC Rule 10b5-1, called "Automatic Buys" and "Automatic Sells", are part of a pre-determined plan or contract, and it is assumed that the plan was created before the insider had any privileged non-public information. Generally, almost all automatic trades are sells, not buys.
Furthermore, even automated trades made under 10b5-1 have some informative or predictive value due to loopholes in the rule that, for example, allow the insider to cancel the trading plan without any penalty or legal liability. So, the insider could set up a 10b5-1 trading plan before they have inside information (for example, from a quarterly report and guidance) while retaining the option to later cancel the plan based on the inside information. So, in effect, the execution of an automated trade also carries some predictive value as insiders retain the option under the existing rules to cancel their trades without penalty or legal liability.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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