Seeking Alpha
Long/short equity, insider ownership
Profile| Send Message|
( followers)  

In this article, I will feature one healthcare 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%.

Varian Medical Systems (NYSE:VAR) designs, manufactures, sells, and services medical devices and software for treating cancer and other medical conditions with radiotherapy, radiosurgery, proton therapy, and brachytherapy worldwide.

(click to enlarge)

Insider selling during the last 30 days

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

NameTitleTrade DateShares SoldRule 10b5-1Current OwnershipDecrease In Ownership
Kolleen KennedySVPJan 9775Yes6,236 shares + 17,065 options3.2%
Elisha FinneyCFOJan 224,321Yes26,434 shares + 36,000 options28.0%
Richard LevyDirectorJan 220,000Yes28,907 shares + 45,000 options21.3%
John KuoSVPDec 303,027Yes15,257 shares + 6,662 options12.1%
Clarence VerhoefSVPDec 231,297Yes1,908 shares40.5%

There have been 49,420 shares sold by insiders during the last 30 days. All these shares were sold pursuant to a Rule 10b5-1 plan.

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 Varian's insider-trading activity by calendar month.

MonthInsider selling / sharesInsider buying / shares
January 201445,0960
December 2013153,5620
November 201376,6360
October 201358,4010
September 201396,5490
August 201355,7750
July 201328,8440
June 201352,0000
May 201330,0190
April 201327,6710
March 2013128,9170
February 201316,9080
January 2013116,4340

There have been 886,812 shares sold, and there have been zero shares purchased by insiders since January 2013. The month of December has seen the most insider selling.

Financials

Varian reported the fiscal 2013 full-year, which ended September 27, financial results on October 23 with the following highlights:

Revenue$2.9 billion
Net income$438.2 million
Cash$1.2 billion
Debt$506.3 million
Backlog$2.9 billion

(Source: Earnings presentation)

Outlook

Varian's guidance is as follows:

Q1/2014FY2014
Revenue growth6%-7%6%-8%
EPS$0.87-$0.91$4.22-$4.34

(click to enlarge)

(Source: Earnings presentation)

Competition

Varian's competitors include Accuray (NASDAQ:ARAY), and Elekta AB (OTCPK:EKTAF). Here is a table comparing these companies.

CompanyVARARAYEKTAF
Market Cap:8.56B661.12M5.72B
Employees:6,400989N/A
Qtrly Rev Growth (yoy):0.02-0.07-0.02
Revenue:2.94B309.87M1.58B
Gross Margin:0.420.32N/A
EBITDA:678.45M-40.03M335.08M
Operating Margin:0.21-0.20N/A
Net Income:438.25M-90.96M188.56M
EPS:3.98-1.280.49
P/E:20.34N/A30.82
PEG (5 yr expected):1.600.061.73
P/S:2.922.133.63

Varian has the second-highest P/S ratio among these three companies. In Accuray, there have been 27,793 shares sold, and there have been 120,000 shares purchased by insiders since January 2013. Only Varian has seen intensive insider selling during the last 30 days.

Conclusion

There have been five different insiders selling Varian, and there have not been any insiders buying Varian during the last 30 days. Four of these five insiders decreased their holdings by more than 10%. Varian has an insider ownership of 0.10%.

Before entering short Varian, I would like to get a bearish confirmation from the Point and Figure chart. The main reason for the proposed short entry is the intensive insider-selling activity.

Source: Varian Medical Systems: 5 Different Insiders Have Sold Shares During The Last 30 Days