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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%.

Splunk (SPLK) provides software solutions that provide real-time operational intelligence.

(click to enlarge)

Insider selling during the last 30 days

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

NameTitleTrade DateShares SoldRule 10b5-1Current OwnershipDecrease In Ownership
Godfrey SullivanCEODec 26-Jan 1570,000Yes2,554,240 shares + 2,527,515 options1.4%
Thomas NeustaetterDirectorDec 26-Jan 156,000Yes73,103 shares7.6%
Thomas SchodorfSVPDec 24-Jan 1430,748Yes281,911 shares + 168,498 options6.4%
Steven SommerSVPJan 7-1463,098Yes

479,617 shares

11.6%
Leonard SteinSVPJan 1310,000Yes87,774 shares + 198,528 options3.4%
David ConteCFOJan 822,918Yes110,000 shares + 445,834 options4.0%
Nicholas SturialeDirectorJan 66,250Yes4,708 shares + 25,000 options17.4%
Guido SchroederSVPJan 38,000Yes114,782 shares + 578,000 options1.1%

There have been 217,014 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 Splunk's insider-trading activity by calendar month.

MonthInsider selling / sharesInsider buying / shares
January 2014197,5140
December 2013123,9480
November 2013120,1660
October 2013130,6680
September 2013539,0910
August 2013115,1660
July 2013309,8570
June 2013116,9710
May 2013121,5000
April 2013307,5000
March 2013413,5130
February 201394,0000
January 2013104,5000

There have been 2,694,394 shares sold, and there have been zero shares purchased by insiders since January 2013.

Financials

Splunk reported the fiscal 2014 third-quarter, which ended October 31, financial results on November 21 with the following highlights:

Revenue$78.6 million
Net loss$16.6 million
Cash$351.9 million

Outlook

Splunk's guidance is as follows:

Q4/2014FY2014
Revenue$88-$90 million$291-$293 million
Non-GAAP operating margin6%-8%~0%

Competition

Splunk's competitors include CA Technologies (CA), Compuware (CPWR), and International Business Machines (IBM). Here is a table comparing these companies.

CompanySPLKCACPWRIBMIndustry Average (Application Software)
Market Cap:8.55B15.54B2.32B206.41B313.82M
Employees:73613,6004,491434,246408.00
Qtrly Rev Growth (yoy):0.51-0.010.03-0.040.22
Revenue:267.94M4.61B953.41M101.36B98.90M
Gross Margin:0.890.860.630.490.68
EBITDA:-43.68M1.59B135.25M25.94B1.17M
Operating Margin:-0.190.310.100.21-0.05
Net Income:-52.54M1.06B-12.01M16.13BN/A
EPS:-0.512.34-0.0614.44N/A
P/E:N/A14.71N/A13.1733.44
PEG (5 yr expected):-318.680.832.921.241.27
P/S:31.803.332.442.023.73

Splunk has the highest P/S ratio among these four companies.

Here is a table of these competitors' insider-trading activities during the last 12 months.

CompanyInsider buying / sharesInsider selling / shares
CA0728,045
CPWR

0

779,518
IBM1,000330,884

Only Splunk has seen intensive insider selling during the last 30 days.

Conclusion

There have been eight different insiders selling Splunk, and there have not been any insiders buying Splunk during the last 30 days. Two of these eight insiders decreased their holdings by more than 10%. Splunk has an insider ownership of 29.30%.

There are 13 analyst buy ratings, nine neutral ratings, and one sell rating with an average price target of $75.08. Before going short Splunk, I would like to get a bearish confirmation from the Point and Figure chart. The four main reasons for the proposed short entry are negative earnings, relatively high P/S ratio, bearish analyst price targets, and the intensive insider-selling activity.

Source: Splunk: 8 Insiders Have Sold Shares This Year