Strong Insider Selling: A Signal For Investors To Sell As Well?

by: Brian Gorban

There are many indicators I use when analyzing a stock. One isunusual option activity. Another indicator I look for are relativelycheap dividend stocks. Finally, another indicator is insider activity, such as theones described here. Looking carefully at insider selling may give us strong reason to shed our positions:

1) Seattle Genetics (NASDAQ:SGEN) is a clinical stage biotechnology company, focusing on the development and commercialization of monoclonal antibody-based therapies for the treatment of cancer and autoimmune diseases in the United States. On Oct. 7, CFO Todd Simpson, sold 24,350 shares. While this wouldn't be a stock I'd be long, as it trades at over 9x P/B, almost 42x EV/EBITDA, and lost over $150M this past year, I don't see this as a strong signal to sell as the CFO has been selling regularly and there actually has been strong buying recently through the investment firm Baker Brothers Life Sciences Capital. Moreover, with the stock sitting right near an all-time high, it's not a surprise to see some profit-taking.

2) Rackspace Hosting (NYSE:RAX) operates in the hosting and cloud computing industry. It provides information technology (IT) as a service, managing Web-based IT systems for small and medium-sized businesses, as well as large enterprises worldwide. On Oct 5., Chief Strategy Officer Lew Moorman, sold 74,750 shares. He has been selling regularly throughout the year and still has approximately 600,000 shares, so I don't see this as alarming. I don't see the stock as cheap though trading at 9x P/B and 5.2x EV/S, so I'd look to sell if I was long this stock based on those fundamental reasons.

3) lululemon athletica (NASDAQ:LULU) together with its subsidiaries engages in the design, manufacture, and distribution of athletic apparel and accessories for women, men, and female youth primarily in Canada, the United States, and Australia. On Oct. 5, Chairman Dennis Wilson sold 50,000 shares. He still owns well over 10M shares after this sale, so this isn't a cause of worry to me. The stock looks priced for perfection at over 50x P/E and 8.5x EV/S and has delivered well for investors, but I'd avoid this stock as any sniff of bad news will most likely send this stock crashing.

4) Alkermes plc (NASDAQ:ALKS), an integrated biotechnology company, develops injectable and oral products for the treatment of central nervous system (CNS) disorders, addiction, diabetes, and autoimmune disorders. On Oct. 3, CEO Richard Pops sold 100,000 shares. This is a cause of concern as his last sale was all the way back in Sept. 2008. The balance sheet looks clean with no debt and just over $2.50/share in net cash. However, this looks to be the typical highly speculative biotechnology company losing over $45M in net income this past year with the money largely spent on R&D and trading at a lofty 5.7x EV/S. I tend to avoid these stocks, but it looks promising for the speculative investor as the balance sheet looks strong for at least two years out while the company looks to find the next big blockbuster drug.

5) Nuance Communications (NASDAQ:NUAN) provides voice and language solutions for businesses and consumers worldwide. On Oct. 3, CEO Paul Ricci sold 151,730 shares. He still owns approximately 2M shares and has been selling regularly so I wouldn't see this as too worrisome. Moreover, the stock is right near a 52-week high and it is common for insiders to do some profit-taking when that occurs.

6) Herbalife (NYSE:HLF), a network marketing company, sells weight management, nutritional supplement, energy, sports and fitness, and personal care products worldwide. On Oct. 3, Chairman and CEO Michael Johnson sold 175,202 shares. He has been selling regularly this year and the stock has still been performing well. Moreover, the stock isn't overpriced either at 18.7x P/E, 1.5% dividend yield, and under 2x EV/S. I'd continue holding this stock if I owned it.

7) CNO Financial Group (NYSE:CNO) through its subsidiaries, engages in the development, marketing, and administration of health insurance, annuity, individual life insurance, and other insurance products for senior and middle-income markets in the United States. On Sept. 30, CEO James Prieur sold 165,280 shares. I wouldn't be too worried as he still owns approximately 1M shares. Moreover, the stock looks cheap now at 4.8x P/E, .3x P/B, and .8x EV/S. I would definitely hold and even look to add to my position in this stock if currently invested in CNO.

Sources: SEC filings, GuruFocus, Yahoo

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CNO over the next 72 hours.