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In this article, I will feature one tech stock that has seen intensive insider selling during the last 30 days. Intensive insider selling can be defined by the following three criteria:

  1. The stock was sold by three or more insiders within one month.
  2. The stock was not purchased by any insiders in the month of intensive selling.
  3. At least two sellers decreased their holdings by more than 10%.

Guidewire Software (GWRE) provides system software to the property and casualty insurance industry primarily in the United States, Canada, Australia, the United Kingdom, and internationally.

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Insider selling during the last 30 days

Here is a table of Guidewire's insider-trading activity during the last 30 days by insider.

Name Title Trade Date Shares Sold Rule 10b5-1 Current Ownership Decrease In Ownership
Jeremy Henrickson VP Oct 14 3,000 Yes 9,521 shares + 11,056 options 12.7%
Craig Conway Director Oct 1 12,000 Yes 225,834 shares 5.0%
Kenneth Branson Director Oct 1 25,000 Yes 596,532 shares 4.0%
Priscilla Hung SVP Oct 1 8,200 Yes 38,987 shares + 5,833 options 15.5%
Alex Naddaff VP Sep 23 1,041 Yes 1,541 shares + 22,918 options 4.1%

There have been 49,241 shares sold by insiders during the last 30 days.

SEC Rule 10b5-1 is a regulation enacted by the United States Securities and Exchange Commission (SEC) in 2000. The SEC states that Rule 10b5-1 was enacted in order to resolve an unsettled issue over the definition of insider trading, which is prohibited by SEC Rule 10b-5. After Rule 10b5-1 was enacted, the SEC staff publicly took the position that canceling a planned trade made under the safe harbor does not constitute insider trading, even if the person was aware of the inside information when canceling the trade. This staff interpretation raises the possibility that executives can exploit this safe harbor by entering into 10b5-1 trading plans before they have inside information while retaining the option to later cancel those plans based on inside information.

For example, a CEO of a company could call a broker on January 1 and enter into a plan to sell a particular quantity of shares of his company's stock on March 1, find out terrible news about his company on February 1 that will not become public until April 1, and then go forward with the March 1 sale anyway, saving himself from losing money when the bad news becomes public. Under the terms of Rule 10b5-1(b) this is insider trading because the CEO "was aware" of the inside information when he made the trade. But he can assert an affirmative defense under Rule 10b5-1(c), because he planned the trade before he learned the inside information.

In general, it is a safer way for an insider to sell shares pursuant to a Rule 10b5-1 trading plan than without it.

Insider selling by calendar month

Here is a table of Guidewire's insider-trading activity by calendar month.

Month Insider selling / shares Insider buying / shares
October 2013 48,200 0
September 2013 502,573 1,000
August 2013 33,200 0
July 2013 43,200 0
June 2013 709,867 0
May 2013 43,200 0
April 2013 62,450 0
March 2013 476,012 0
February 2013 986,486 0
January 2013 103,525 1,000

There have been 3,008,713 shares sold and there have been 2,000 shares purchased by insiders this year.

Financials

Guidewire reported the fiscal 2013 full-year, which ended July 31, financial results on September 3 with the following highlights:

Revenue $300.6 million
Net income $15.4 million
Cash $207.7 million

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Outlook

Guidewire anticipates total revenue for fiscal 2014 to be in the range of $328.5 million to $340.5 million, an increase of 11% at the mid-point. Guidewire expects full-year non-GAAP operating income in the range of $18.2 million to $22.2 million, representing non-GAAP operating margin of 6% at the mid-points of revenue and operating income guidance.

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Looking at the first quarter of fiscal 2014, Guidewire anticipates total revenue to be in the range of $61.4 million to $63.4 million. For the first quarter, Guidewire anticipates non-GAAP net loss of between $10.3 million and $9 million.

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Competition

Guidewire's competitors include Accenture (ACN), and Computer Sciences Corporation (CSC). Here is a table comparing these companies.

Company GWRE ACN CSC
Market Cap: 2.73B 47.36B 7.71B
Employees: 1,149 275,000 90,000
Qtrly Rev Growth (yoy): 0.43 0.04 -0.10
Revenue: 300.65M 28.56B 14.62B
Gross Margin: 0.56 0.33 0.22
EBITDA: 21.67M 4.66B 2.13B
Operating Margin: 0.06 0.14 0.07
Net Income: 15.38M 3.28B 620.00M
EPS: 0.25 4.93 6.97
P/E: 189.86 14.93 7.51
PEG (5 yr expected): 17.36 1.37 1.80
P/S: 9.49 1.66 0.54

Guidewire has the highest P/S ratio among these three companies.

Here is a table of these competitors' insider-trading activities this year.

Company Insider buying / shares Insider selling / shares
ACN 20,000 167,730
CSC 0 46,795

Only Guidewire has seen intensive insider selling during the past 30 days.

Conclusion

There have been five different insiders selling Guidewire and there have not been any insiders buying Guidewire during the past 30 days. Two of these five insiders decreased their holdings by more than 10%. Guidewire has an insider ownership of 3.20%.

Guidewire is trading at a P/E ratio of 189.86 and a forward P/E ratio of 100.75. The company has a book value of $3.96 per share.

Before entering short Guidewire, I would like to get a bearish confirmation from the Point and Figure chart. The three main reasons for the proposed short entry are high P/E ratio, high P/S ratio, and the intensive insider selling activity.

Source: Insiders Are Selling Guidewire