Insider selling has generally been viewed as a warning sign for general investors, but sometimes this selling is can be justified. Today we share three S&P 500 stocks that are due to release their first quarter 2013 earnings this week; two have insider selling that would suggest avoiding the companies, while the third has a misleading amount of insider selling -- a reason to watch it.
* as of 19th April.
Source: Yahoo! Finance
The Two to Avoid
Reynolds American (RAI) is a dominant U.S. tobacco company set to report earnings April 23rd, 2013. It holds the second position in the United States and is present in smokeless tobacco, primarily in the discount segment. RAI's brands include Camel, Kool, Winston and Salem, with Grizzly and Kodiak leading the smokeless division. RAI holds 26% of the U.S. tobacco market share.
The company has expanded itself in other areas in order to overcome and counterbalance its weak performance in the traditional cigarette business. It is currently investing in marketing and R&D to encourage its NGT products. One of the pioneers in this segment, RAI is hoping to set itself up for long-term gains.
RAI's product, Vuse e-cigarette, will soon be tested in markets outside of Virginia and North Carolina. In those states, the product has been available since mid-2012. Vuse e-cigarettes are comparatively more advanced than its competitors and provide a competitive advantage in terms of the technology employed and higher grade materials. The product is in testing phase and should be much improved so that it can pass both regulatory and consumer tests. Vuse may help RAI to compete more intensely in this category than its main competitor, the Altria Group (MO).
The FDA has yet to approve the Eclipse Heat, a no-burn cigarette by RAI. If it gets the green signal from the FDA, it will serve as competition as a lower or modified risk product, and could derive benefits both in the United States and from abroad by licensing the technology.
For full year 2012, the company posted net sales of $8.3 billion, a slight decline from $8.5 billion in 2011. The sales were lower due to health concerns and ongoing anti-smoking campaigns. The EPS for the full year came in at $2.97, an increase from 5.7% year on year.
Since February, both the CEO Daniel Delen and CFO Thomas Adams have both sold more than 15% of their total shares at a price of $43.03 per share. Whenever senior management is selling more than 15% of their position, it tends not to be good. On top of that, one of RAI's greater than 10% owners, Brown and Williamson Holdings, has been selling shares between $40-57 per share and has effectively reduced their position by almost 7%.
Ventas Inc (VTR) is a real estate investment trust (REIT) whose portfolio includes senior housing and healthcare properties. The company, which reports earnings on April 26th, 2013 has three business segments: triple-net leased properties, senior living operations and MOB.
Senior housing communities provide 50% of VTR's business. There has been a surge in demand of senior living facilities for many years now, and this trend is expected to continue as the Baby Boomer generation continues to age. VTR is in a good position to benefit from this segment as this increasing demand for senior housing continues to outweigh the available supply.
The FFO for the fourth quarter 2012 came in at $0.99 per diluted share, an increase of 11% from the corresponding quarter of 2011 per share of $0.89. The normalized FFO posted a 13% increase to $294 million in comparison to the fourth quarter of last year coming in at $259 million.
However, the company is lately getting tough competition as other players enter the scene to try and capitalize on consumer demand. Ventas' peers such as Brookdale Senior Living (BKD) and Health Care REIT (HCN) have expanded their number of units owned by over 16,000, while Elmcroft Senior Living added over 14,000 units.
The concern for VRT right now is the growing amount of competition, as other companies expand themselves into the same business. This trend is acting as a catalyst to bring down VTR's margins, along with returns on invested capital.
In March, three insiders sold shares between the $70-72 a share range: the CEO, Debra Cafaro, Chief Accounting Officer & Controller Robert Brehl, and Director Ronald Geary. Each sold more than 10% of their shares, with the Accounting Officer Mr. Brehl reducing his position the most - reducing it close to 35%. Director Robert Geary and CEO Debra Cafaro reduced their positions 24% and 12% respectively.
The One to Watch
Edwards Lifesciences Corp. (EW) is the world leader in the science of heart valves and hemodynamic monitoring and is set to report earnings on April 23rd, 2013. The company reported its net income for the last quarter of 2012 at $91.1 million, or $0.77 per diluted share, in comparison to $63.1 million, or $0.53 per diluted share for the corresponding period of 2011.
The year 2012 came in as a satisfying year for this California-based company. The company posted good numbers in total sales, earning per share, gross margin and R&D expenditures. In the S&P 500 component, EW ranked #274, replacing DTE Energy Co. (DTE).
Edwards Lifesciences was one of the top ten performers in the second quarter on the S&P 500. The company received special approval in October 2012 for the treatment of high risk aortic stenosis patients and was also allowed to use a new approach to access the heart through the breastbone, a procedure that will provide the company with additional market expansion. EW now enjoys a dominant position, or even a monopoly on the TAVR (transcatheter aortic valve replacement) procedure as competitor Medtronic's (MDT) CoreValve is still in the clinical trial stage.
EW increased sales in all the international regions except for Europe. Additionally, the company won its case against Medtronic in November. Edwards looks optimistic for 2013, expecting 13% to 16% global sales growth backed by rising sales of transcatheter valves forecasted between $710 million and $790 million. Total sales are expected to be around $2.1 billion to $2.2 billion and earnings per share are forecasted to increase by more than 25% over expected 2012 earnings.
Like the other two business discussed EW has a number of insider sell transactions. The most active sellers include CEO Michael Mussallem, CVP Huimin Wang, CVP John Kehl, CVP Thomas Abate, and Director Michael Bowlin. All have had sales in the past quarter, a closer look suggests the news is not as negative as on first glance; what makes Edward Lifesciences different is that insiders have actually grown their overall share position in the last quarter. Each grew their positions more than 5%, with CVP Thomas Abate leading group with a 26% increase in his total position. CEO Michael Mussallem grew his position 13%, CVP Huimin Wang was up 15%, CVP John Kehl was up 12%, and Director Michael Bowlin brought up the rear with a 5% increase.
Insider selling can be a good indicator of when to avoid a stock, however one should always be careful to look more closely at the transactions and verify that insiders are actually reducing positions. As shown with EW, sometimes the sales are overcompensated for with options exercised, effectively growing the position.
Additional disclosure: Black Coral Research is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.