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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%.

Palo Alto Networks (NYSE:PANW) offers a network security platform in the Americas, Europe, the Middle East, Africa, the Asia Pacific, and Japan.

(click to enlarge)

Insider selling during the last 30 days

Here is a table of Palo Alto Networks' insider-trading activity during the last 30 days by insider.

NameTitleTrade DateShares SoldRule 10b5-1Current OwnershipDecrease In Ownership
Rajiv BatraVPJan 2-15155,000Yes1,216,716 shares11.3%
Asheem ChandnaDirectorJan 7-1096,250Yes2,848 shares97.1%
Nir ZukCTOJan 2110,000Yes3,006,556 shares3.5%

There have been 361,250 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 Palo Alto Networks' insider-trading activity by calendar month.

MonthInsider selling / sharesInsider buying / shares
January 2014361,2500
December 2013420,0000
November 2013100,0000
October 2013100,0000
September 2013190,0000
August 201340,1000
July 201340,0000
June 201380,0000
May 201350,0000
April 2013123,0320
March 2013332,7320
February 201300
January 201300

There have been 1,837,114 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

Palo Alto Networks reported the fiscal 2014 first-quarter, which ended October 31, financial results on November 25 with the following highlights:

Revenue$128.2 million
GAAP net loss$7.9 million
Cash$436.7 million

Outlook

Palo Alto Networks' fiscal 2014 second-quarter guidance is as follows:

Revenue$132-$136 million
Non-GAAP EPS$0.08-$0.09

Competition

Palo Alto Networks' competitors include Check Point Software Technologies (NASDAQ:CHKP), Cisco Systems (NASDAQ:CSCO), and
Juniper Networks (NYSE:JNPR). Here is a table comparing these companies.

CompanyPANWCHKPCSCOJNPR
Market Cap:4.38B12.61B118.69B14.00B
Employees:1,2642,70675,049N/A
Qtrly Rev Growth (yoy):0.490.040.020.12
Revenue:438.35M1.38B48.82B4.67B
Gross Margin:0.730.880.610.63
EBITDA:-6.62M771.88M14.06B794.90M
Operating Margin:-0.040.550.240.13
Net Income:-33.59M632.66M9.89B439.80M
EPS:-0.483.131.840.86
P/E:N/A20.6412.0732.23
PEG (5 yr expected):4.361.971.361.42
P/S:10.229.262.472.90

Palo Alto Networks 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
CHKPN/AN/A
CSCO

0

4,604,743
JNPR0823,698

Only Palo Alto Networks has seen intensive insider selling during the last 30 days.

Conclusion

There have been three different insiders selling Palo Alto Networks, and there have not been any insiders buying Palo Alto Networks during the last 30 days. Two of these three insiders decreased their holdings by more than 10%. Palo Alto Networks has an insider ownership of 5.10%.

Before going short Palo Alto Networks, I would like to get a bearish confirmation from the Point and Figure chart. The three main reasons for the proposed short entry are negative earnings, relatively high P/S ratio, and the intensive insider-selling activity.

Source: Palo Alto Networks: 3 Different Insiders Have Sold Shares This Year