By Matt Doiron
Insider sales often aren't as informative as insider purchases, since insiders could simply be diversifying their wealth in accordance with economic theory rather than expressing outright bearishness on the stock. As a result we don't read too strongly into insider sales. We can, however, treat insider sales - particularly by multiple insiders - as one factor to screen for alongside high earnings multiples and therefore identify potentially overvalued stocks which investors can then research further. Here are five stocks of which at least three insiders have sold shares in the last three months, and which have trailing and forward P/E multiples of 30 or higher:
Facebook (FB) is certainly quite expensive in terms of either its trailing earnings or forward estimates - specifically, the forward P/E based on consensus for 2014 is 34 - as investors are expecting the social network to become more successful in converting revenue growth to improvements on the bottom line. Several insiders have sold some of their Facebook shares in April, although of course we are not too far out from when the company went public. Revenue rose 40% in the fourth quarter of 2012 versus a year earlier. Facebook had been one of the most popular tech stocks among hedge funds in the fourth quarter of 2012 (find more tech stocks hedge funds loved).
Another social network, professional networking site LinkedIn (LNKD), also meets our criteria. The stock is up 78% in the last year, as both sales and net income have risen strongly in percentage terms; however, the market is already incorporating very high expectations with analyst consensus for 2014 implying a forward P/E of 91. Our database shows multiple insiders selling the stock in mid-April at about $180 per share. Tiger Cub Philippe Laffont's Coatue Management trimmed its stake between October and December, but closed 2012 with about 570,000 shares in its portfolio (check out Coatue's favorite stocks).
Range Resources (RRC) is expected to significantly increase its earnings per share over the next couple of years, to $2.21 for 2014; hitting that target- which, again, assumes high earnings growth- would give the oil and gas exploration and production company a forward earnings multiple of 36. Most of the company's revenue comes from natural gas, which currently faces a poor pricing environment and the sell-side is clearly expecting a recovery there. Billionaire T. Boone Pickens was buying Range in Q4, and at the end of 2012 it was one of his largest holdings by market value (see Pickens's stock picks), though we have seen several company officers sell shares since the beginning of March.
Multiple officers have also been selling shares of Sourcefire (FIRE), a security software company with a market capitalization of $1.6 billion. That valuation places Sourcefire at very high earnings multiples, including more than 40 times its forward earnings estimates. 19% of the float is held short as many market players think that figure is too high. While revenue did rise strongly in its last quarterly report compared to the fourth quarter of 2011, net income actually fell by 36%. Given how dependent Sourcefire is on increasing its earnings, we don't think that the stock is a good value.
In the middle of March, multiple insiders sold shares of Commvault (CVLT), a $3.4 billion market cap enterprise data software company. In this case, the company's high valuation - its trailing P/E is over 70 - can be somewhat justified on the basis of high growth, as in its most recent quarterly report Commvault experienced 70% earnings growth compared with the same period in the previous fiscal year. However, revenue was "only" up 24% and so we would be concerned that going forward improvements in net income might only be large rather than very large.