Overall, during the past week, corporate insiders traded a number of transportation sector stocks, including significant corporate insiders selling in Norfolk Southern Corp. (NSC), and institutional insider selling in YRC Worldwide (YRCW). This report, part of our weekly coverage of insider trades by sector (based on last week’s SEC Forms 3, 4, and 5 filings), summarizes last week’s major insider filings in the transportation sector (for a general discussion on how to interpret insider trades, please look at the end of this article):
Norfolk Southern Corp. (NSC): NSC via Norfolk Southern Railway operates a 20,000-mile railroad in 22 states and D.C. Insiders currently hold 2.6 million shares or 0.7% of outstanding shares, and during the last week, three insiders exercised their options and sold (automatic sale) the resulting 32,294 shares, including EVP Planning & CIO Deborah Butler (15,900 shares), EVP Administration John Rathbone (13,394 shares) and VP & Controller Clyde Allison Jr. (3,000 shares), all three selling under their 10b5-1 plans. This is significant in that it is a strong acceleration in insider selling, as in comparison, insiders sold no shares (also buying none) over the prior eleven weeks of the last three months, and they sold 77,970 shares in the prior nine months of the year.
Southwest Airlines Co. (LUV): LUV provides predominantly short-haul, high-frequency, point-to-point, low-fare domestic airline service to 69 cities in 35 states. Insiders currently hold 4.9 million shares or 0.7% of outstanding shares, and during the last week, Chairman of the Board and CEO Gary Kelly sold 12,000 shares at $8.56 for $0.1 million. While the amount is small, it is significant in the sense that this is the fast open market sell by Mr. Kelly of company shares since June 2008. Also, company insiders have made no sales in the last three months (and no purchases either), and they have only sold a total of 57,033 shares in the past year.
United Parcel Service (UPS): UPS delivers packages and documents throughout the U.S. and over 220 other countries. Insiders currently hold 2.5 million shares or 0.25% of outstanding shares, and during the last week, Sr. VP Allen Hill sold (regular sale) 11,736 shares. While the amount is small, it is significant in the sense that it is a regular sale, and given that overall company insiders are generally not heavy sellers, selling only 8,097 shares (no buys) over the prior eleven weeks of the last three months, and selling a total of 88,057 shares (no buys) over the past year.
YRC Worldwide Inc. (YRCW): YRCW is an international provider of asset and non-asset based transportation services across the U.S., Puerto Rico, Canada, Guam, and Mexico. Catalyst Fund Limited Partnership II, managed by private equity owner Catalyst Capital Group Inc. (OTCQB:CCGI) out of Toronto, Canada, reported last week that it sold 8.54 million shares between October 27, and November 1. CGI has been a heavy seller recently, and as we reported earlier in our weekly review of insider selling by sector, it sold another 2.86 million shares during the week ending October 28, and another 5.15 million shares during the week ending October 21. Overall, insiders have sold 137.2 million shares during the last three months, while buying none during that period.
JetBlue Airways Corp. (JBLU) provides point-to-point passenger airline service to 60 cities in 20 states, Puerto Rico, Caribbean and Latin America. Insiders currently hold 55.3 million shares or 18.8% of outstanding shares, and during the last week, two insiders sold (regular sale) a total of 12,830 shares. The insiders included EVP & General Counsel James Hnat (5,430 shares) and CEO Dave Barger (7,500 shares). Over the last three months, insiders sold a total of 53,761 shares, and bought none during that period.
Paccar Inc. (PCAR): PCAR designs, manufactures, and distributes light-, medium-, and heavy-duty trucks and related aftermarket parts primarily in the United States and Europe. It is the third largest manufacturer of heavy-duty trucks in the world after Volvo and Daimler, and markets its heavy-duty diesel trucks under the Kenworth, Peterbilt, and DAF nameplates. The company sells its products for use in over-the-road and off-highway hauling of freight, petroleum, wood products, construction, and other materials. Insiders currently hold 17.1 million shares or 4.7% of outstanding shares. Director Thomas Plimpton reported Monday that he exercised options and sold (regular sale) the resulting 65,255 shares at $43.98 for $2.87 million on the preceding Friday. After the transaction, Mr. Plimpton holds 67,811 shares, so the 65,255 shares sold last week were a significant portion of his company holdings. Also, overall insiders did not sell any more shares (and bought none as well) in the prior twelve weeks of the last three months.
General Discussion on Insider Trading
The reports in this series identify last week’s insider trades of noteworthy significance by sector or industry group, either by virtue of their timing, their size, the number of insiders buying or selling, based on who is buying or selling, or by the trend of their buys and sales over the long-term.
What is Insider Trading?: Insider trading as defined here (and by the SEC) includes not just corporate insiders such as company executives and key employees, but also directors and large shareholders that have access to non-public information. Large shareholders are defined by the SEC for this purpose are those that having beneficial ownership of ten percent of more of the firm’s equity securities (including institutional investors). Also, in the U.S., “insiders” are not just limited to corporate officials and major shareholders, but also when a corporate insider “tips” a friend about material non-public information, the duty the corporate insider owes the company is now imputed to the friend who is now in violation of a duty to the company if he or she trades on the basis of that information. The U.S. is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them.
While most insider trading is legal, the term is commonly used to refer to the illegal kind when a corporate insider trades based on material non-public information that can have an effect on the company’s share price. By law, insiders are prohibited from trading based on nonpublic information, but most believe that such trading does occur around the edges. The thinking goes that corporate insiders, because of their access, have the most up-to-date information on the health of their companies and the industries they operate in. Investors, as a result, can benefit from the timely knowledge of insider transactions. In fact, one University of Michigan study found that when executives bought shares in their own companies, the stocks tended to outperform the total market by 8.9% over the next 12 months. Conversely, when they sold shares, the stock underperformed by 5.4%.
Timeliness of Information: Like in the 13-D and 13-G filings for Institutions, the SEC Forms 3 and 4 on insider filings are extremely timely, and hence of greater significance, as they must be reported within two business days of the trade.
Insider Buying More Informative than Selling: As a rule, insider buys are more informative than sells. This is because insiders sell often, and they sell for a variety of reasons that may be completely unrelated to the health of the company, including, for example, to diversity their holdings or to pay for an upcoming personal expense. In contrast, insider buying is relatively uncommon, and since they have an exclusive window into their own company’s performance, it is reasonable to presume that they probably have good reasons based on information at their disposal when they are risking their own assets to buy company stock.
Regular and Automatic Trades: Insider trades may be regular trades, or they may be automatic trades made under SEC Rule 10b5-1. It is generally believed that regular insider share purchases and sales carry more predictive value as they are made voluntarily by the insiders. Conversely, trades made under SEC Rule 10b5-1, called “Automatic Buys” and “Automatic Sells”, are part of a pre-determined plan or contract, and it is assumed that the plan was created before the insider had any privileged non-public information. Generally, almost all automatic trades are sells, not buys.
Furthermore, even automated trades made under 10b5-1 have some informative or predictive value due to loopholes in the rule that, for example, allow the insider to cancel the trading plan without any penalty or legal liability. So, the insider could set up a 10b5-1 trading plan before having inside information (for example, from a quarterly report and guidance) while retaining the option to later cancel the plan based on the inside information. So, in effect, the execution of an automated trade also carries some predictive value as insiders retain the option under the existing rules to cancel their trades without penalty or legal liability.
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