Strong Insider Selling: Not Always A Signal To Sell

by: Brian Gorban

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

  1. Kellogg Company (NYSE:K) and its subsidiaries manufacture and market ready-to-eat cereal and convenience food products primarily in North America, Europe, Latin America, and the Asia Pacific. On Oct. 7, The Kellogg Foundation Trust sold 100,000 shares. However, upon further review, the foundation still owns close to 80M shares and has had routine selling for many years and this wouldn't worry me at all. In fact, with K trading at 16x P/E, under 2x EV/S, a very strong return on equity in excess of 50%, and very secure 3.2% dividend yield, I'd be a buyer here.
  2. Higher One Holdings (NYSE:ONE) provides technology and payment services to the higher education industry in the United States. On Oct. 7, President and CEO Dean Hatton sold 42,634 shares, while on Oct. 6, COO Lasater Miles sold 30,000 shares, while the Chief Service Officer and Chief Sales officer sold collectively over 20,000 shares. There still is large insider holding of approximately 40%, but interesting to see so many in the senior management making sizeable sales as the company recently dropped from its high near $22. Balance sheet looks great with no debt and almost $1.25/share in net cash. Pretty expensive though at 33x trailing P/E and 18x forward P/E, 8.4x P/B, and 12.3x EV/EBITDA. If I were going to sell, my reasoning would more be due to valuations then the recent insider selling.
  3. Discover Financial Services (NYSE:DFS), a bank holding company, offers direct banking and payment services in the United States. On Oct.5, Executive VP Harwit Talwar sold 52,745 shares. He still owns approximately 300,000 shares and with attractive valuations at 6.7x P/E, return on assets in excess of 3% and return on equity over 29%, and over $3.8B in FCF this past year, I'd be a buyer in fact of DFS on any weakness.
  4. Google (NASDAQ:GOOG) maintains an index of web sites and other online content for users, advertisers, and Google network members and other content providers. On Oct. 4, Co-Founder and major shareholder Sergey Brin sold 83,334 shares. This doesn't look worrisome to me at all, as it looks to be a regular selling plan he has to sell on the first Tuesday of every month 83,334 shares. In fact, GOOG, is historically cheap here at 19.6x trailing P/E and 13x forward P/E, approximately $34B in net cash, and over $7B in FCF. This is a buy for the value-growth investor.
  5. Aruba Networks (NASDAQ:ARUN) provides next-generation network access solutions for the mobile enterprises worldwide. On Oct. 3, Co-Founder and CTO Keerti Melkote sold 50,000 shares. This doesn't worry me as he still owns approximately 1.2M shares and has been selling regularly. The company has a great balance sheet with no debt and over $2/share in net cash, along with a great return of equity in excess of 28%. I wouldn't buy this stock as it's trading at 38.5x trailing P/E and 5.7x EV/S, but this insider sale wouldn't cause me to sell if I were holding.
  6. Tiffany & Co. (NYSE:TIF), through its subsidiaries, engages in the design, manufacture, and retail of fine jewelry worldwide. On Sept. 28, board director Peter May sold 200,000 shares and the day before 400,000 shares. This looks to be an exodus at first, however, when looking closer, Peter still owns approximately 4M shares and is most likely looking to diversify his investments. The company looks reasonably priced at 22x P/E, 2.6x EV/S, and 1.7% dividend yield.
  7. Douglas Emmett (NYSE:DEI),a real estate investment trust, owns and operates office and multifamily properties in California and Hawaii. On Sept. 27, Chairman Dan Emmett, sold 140,000 shares. However, with him still holding approximately 8M shares, I don't see this as a cause of concern.
  8. Western Refining (NYSE:WNR) , through its subsidiaries, operates as an independent crude oil refiner and marketer of refined products in Texas, Arizona, New Mexico, Utah, Colorado, and the Mid-Atlantic region. On Sept. 27, Chairman Paul Foster sold 63,750 shares. However, with him holding still well over 25M shares, this isn't a cause of concern to me. Moreover, the stock is attractively priced at 13x P/E, .2x P/S, and .3x EV/S.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.