By Matt Doiron
Economic theory suggests that it is rational to diversify one's investments, and one application of this is that company insiders - who are, effectively, "invested" in the company already - should diversify their wealth away from the stock. This is why, as a general rule, we don't pay much attention to insider selling. However, alongside other stock screens (for example, the presence of a number of short sellers) the existence of multiple insider sales can be somewhat interesting and could certainly serve as warning signs for investors who own these stocks. Here are five stocks with market capitalizations of at least $10 billion and with high short interest, which at least three insiders have sold in the last three months:
The short ratio (number of shares short dividend by daily volume) is about 15 at M&T Bank (MTB), a $13 billion market cap bank focused on the mid-Atlantic region. We recorded three company officers selling shares in April at prices of about $99 per share. While M&T Bank does trade at a premium to the book value of its equity - the P/B ratio is 1.3 - the company has apparently done well at monetizing these assets as the trailing earnings multiple is only 13. Warren Buffett's Berkshire Hathaway reported a position of 5.4 million shares in M&T Bank at the end of December (find Buffett's favorite stocks).
Another popular short is salesforce.com (CRM), which is valued at $24 billion despite very low profitability and a history of underperforming sell-side expectations. Short sellers are responsible for 11% of the float, and we have tracked a few insiders entering sales since the beginning of April. We would note that revenue has been up, though the forward earnings multiple is quite high at 65 and we're highly skeptical that the company deserves that valuation. Renaissance Technologies, founded by billionaire Jim Simons, added shares between October and December and closed 2012 with about 870,000 shares in its portfolio (see Renaissance's stock picks).
Multiple insiders have sold shares of Cerner (CERN), a healthcare information technology company with a market capitalization of $16 billion. That valuation places the stock price at trailing and forward P/Es of 41 and 28, respectively - clearly premium pricing. The short ratio here is 11, reflecting a sizable bearish community. In the fourth quarter of 2012, Cerner did experience double-digit growth rates on both top and bottom lines: revenue grew 15% versus a year earlier, and net income came in 23% higher. However, the stock is expensive enough that we think it needs to grow faster than that to justify the current price.
Sysco (SYY), a $20 billion market cap distributor of food and other products to restaurants and other hospitality businesses, had three company officers sell a significant number of shares in March of this year. The most recent data shows a short ratio of almost 9. We would note that Sysco pays a dividend yield of 3.2%, thought it does trade at 19 times trailing earnings and net income figures have been down a bit. Donald Yacktman's Yacktman Asset Management reported a position of nearly 29 million shares in its most recent 13F, a stake worth over $900 million at that time (check out more stocks Yacktman owns).
A number of company officers and Board members at IntercontinentalExchange (ICE), an operator of asset markets and clearinghouses, have been selling shares in the past few months. IntercontinentalExchange does also feature high short interest, and this makes some degree of sense as business has been slow recently (in the fourth quarter of 2012, revenue and earnings changed by less than 3% versus a year earlier) yet the trailing P/E is 21. It is at least possible that business could pick up, and analysts are looking for somewhat higher earnings growth, but we still wouldn't consider the stock a value opportunity.