Top Executives at Seagate Technology PLC (STX), Infinera Corp. (INFN) and Tempur Sealy International Inc. (TPX) Are Loading Up on Shares

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.

Let’s move on to the next two pages of this article, where we discuss the insider buying registered at Infinera Corp. (NASDAQ:INFN) and Tempur Sealy International Inc. (NYSE:TPX).

Infinera Has Two Top Executives Purchase Shares

Infinera Corp. (NASDAQ:INFN) saw its two most influential and informed executives purchase shares earlier this week. To start with, Chief Financial Officer Brad Feller purchased 25,000 shares on Tuesday at prices that ranged from $11.73 to $11.76 per share, lifting his overall holding to 86,628 shares. More importantly, Chief Executive Officer Thomas J. Fallon snapped up 100,000 shares on the same day at prices that fell between $11.77 and $12.00 per share, all of which are held directly by the Fallon Family Revocable Trust, which currently owns 988,815 shares.

The maker of optical transport networking equipment has seen its market value drop by 36% since the beginning of 2016, partly owing to disappointing guidance issued for the ongoing quarter. In fact, the stock reached a new 52-week low of $11.50 on Tuesday, which explains why both the CFO and CEO bought massive blocks of shares on that day. Infinera recorded revenue of $244.8 million for the first quarter of fiscal year 2016 ended March 26, an increase from $186.9 million reported for the first quarter of fiscal year 2015. Infinera management projects fiscal second quarter revenue of $250 million-to-$260 million, notably below analysts’ average estimate of $272 million. This would also represent substantial top-line growth braking from the 31% growth recorded in the fiscal first quarter.

A number of analyst downgrades and price target cuts followed the release of Infinera’s latest financial results. Analysts at Citigroup downgraded the stock to ‘Neutral’ from ‘Buy’ and cut their price target on it to $17 from $20. Similarly, MKM Partners downgraded Infinera to ‘Neutral’ from ‘Buy’ and trimmed their price target to $15 from $21. The stock is priced at 13.3-times expected earnings, slightly above the forward P/E ratio of 12.3 for the communications equipment sector.

Rail-Splitter Capital Management, overseen by John Croghan and Richard Fradin, acquired a new stake of 472,321 shares of Infinera Corp. (NASDAQ:INFN) during the March quarter.

The World’s Largest Bedding Provider Has CFO Buy Shares

Tempur Sealy International Inc. (NYSE:TPX) also had one of its top-tier executives purchase shares earlier this week. Barry Hytinen, Chief Financial Officer and Executive Vice President, bought 16,665 shares on Tuesday at prices ranging from $59.17 to $60.50 per share, boosting his overall holding to 32,687 shares.

The shares of the world’s largest bedding provider are down by 15% since the beginning of 2016. Just recently, Tempur Sealy released its first quarter earnings report, disclosing total net sales of $721.0 million for the quarter. That represented a decrease of 2.5% compared to the top-line figure reported for the first quarter of 2015. The company’s net sales increased by an impressive 5.4% during 2015 to $3.15 billion, so the first quarter top-line decline in growth surely disappointed investors. Let’s remind you that Tempur Sealy has been weighed down by certain issues involving the Danish Tax Authority (SKAT), as the mattress manufacturer received income tax assessments from SKAT amounting to $199.6 million. The company has also been facing increased competitive pressure from online mattress sellers, who started shipping mattresses to customers’ doors in small-sized boxes. However, Tempur Sealy has announced the debut of a new offering in the e-commerce space called Cocoon by Sealy, in an attempt to combat the fast-increasing competition from the aforementioned online vendors.

Tempur Sealy’s shares are currently trading at a forward P/E multiple of 13.2, significantly below the ratio of 18.0 for the consumer discretionary sector. There were 36 hedge funds in our system with stakes in the company on December 31, which amassed nearly 26% of its outstanding common stock. Ken Fisher’s Fisher Asset Management reported owning 214,840 shares of Tempur Sealy International Inc. (NYSE:TPX) as of March 31.

Disclosure: None