Analyzing Friday's Noteworthy Insider Buys And Sells

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 |  Includes: ABT, ANTM, APKT, AZO, CAG, CIE, CIEN, DO, MAR, ZAGG
by: GuruFundPicks

Insiders reported that on Friday December the 23rd, they bought and sold stock in over 210 separate transactions in 107 different companies. These transactions have to be reported within two days of the trade, so the transactions occurred sometime late last week. We culled through these 210 or so insider buys and sells (based on SEC Forms 3, 4, and 5 filings), as part of our daily and weekly coverage of insider trades, and present here the most notable trades reported Friday (for a general discussion on how to interpret insider trades, please look at the end of this article):

Abbott Laboratories (ABT): ABT is a developer of pharmaceuticals, diagnostic systems, nutritional supplements and vascular, ophthalmic and eye care products. Insiders currently hold 6.4 million or 0.4% of outstanding shares. On Friday, four insiders reported exercising options and selling the resulting total of 770,027 shares for $42.6 million. The majority of the shares were sold by CEO Miles White (675,674 shares), and the other sellers included VP Greg Linder (75,203 shares), SVP Michael Warmuth (14,363 shares) and SVP Carlos Alban (4,787 shares). The sales by VP Linder, SVP Warmuth and SVP Alban were made pursuant to 10b5-1 plans. Overall, insiders sold only a total of 1.65 million shares in the past year. ABT is a consistent grower, with annual earnings up every year recently even through the 2008/09 recession, it sports a healthy dividend yield of 3.5%, and trades at a discount 11 forward P/E and 3.4 P/B compared to averages of 11.8 and 4.2 for the large cap pharmaceuticals group. Furthermore, earnings growth is projected in the high single to low double digits versus the 5%-6% average for the group. Also, the stock is approaching its 2007 highs in the $60 range while earnings are 70%-80% higher than they were then. The stock based on its dividend yield, and earnings growth and stability, has the characteristics that a wide cadre of investors would find attractive.

Conagra Food Inc. (CAG): CAG is an industry-leading, branded and value-added food company that produces shelf-stable and frozen foods, processed meats, retail food, food ingredients and agricultural products that are sold in various retail and foodservice channels. On Friday, CFO John Gehring reported exercising options and selling the resulting 108,883 shares for $2.9 million, and EVP General Counsel & Corp. Secretary Colleen Batcheler reported exercising options to acquire 20,000 shares and sold 17,916 shares for $0.5 million. Overall, insiders sold only an additional 31,497 shares in the past year. CAG trades at the highs of the year, up 18% YTD, and it trades at a discount 13-14 forward P/E and 2.4 P/B compared to averages of 41.5 and 2.5 for its peers in the diversified food manufacturers group.

Cobalt International Energy (CIE): CIE is engaged in the exploration and production of oil primarily in the deepwater of the U.S. Gulf of Mexico, and in offshore Angola and Gabon in West Africa. Insiders currently hold 44.6 million or 11.5% of outstanding shares. On Friday, three insiders reported selling a total of 396,588 shares for $6.0 million. This included Chief Exploration Officer James Farnsworth (320,000 shares), COO Van Whitfield (56,588 shares) and VP Government & Public Affairs Lynne Hackedorn (20,000 shares), with all shares sold pursuant to 10b5-1 plans. These sales are on top of the 80,000 shares sold by Chief Exploration Officer James Farnsworth that we reported just last week. Overall, insiders sold a total of 476,588 shares in the past three months. CIE shares have rallied strongly recently, up 76% in the past six trading days after the company reported major developments in its activities in West Africa. Specifically, on Friday December 16th, Diamond Offshore (DO) disclosed in its 8-K that CIE had extended a $360,000/day lease for DO's Confidence oil rig, indicating that the rig was being used to search for crude oil in Angolan waters. And then last Tuesday, it reported signing a deal with Angola's government to explore for oil off its coast, which was followed by even more positive news on Wednesday when Goldman added CIE to its "Americas Buy" list and raised its price target of $21 from $14, well above where it traded at that time.

Ciena Corp. (CIEN): CIEN is a designer of Ethernet transport and switching systems used in network infrastructure by telecom and cable service providers. Insiders currently hold 4.7 million or 4.9% of outstanding shares. On Friday, eight insiders reported selling a total of 104,375 shares for $1.2 million, all sold pursuant to 10b5-1 plans. The major sellers included CEO Gary Smith (39,800 shares), SVP and CTO Stephen Alexander (21,812 shares), SVP James Frodsham (12,208 shares) and CFO James Moylan (11,880 shares). Overall, insiders sold only an additional 38,250 shares during the past three months. CIEN shares trade at their lows, down 42% YTD, and they trade at 12.9 forward P/E compared to the 12.4 average for the fiber-optics group, while earnings are projected to rise strongly from 25c loss in 2010 to 52c profits in 2012 to 94c profits in 2012.

Zagg Inc. (ZAGG): ZAGG manufactures protective clear coverings and accessories for consumer electronic and handheld devices worldwide under the invisibleSHIELD brand name. Insiders currently hold 12.1 million or 41.4% of outstanding shares. On Friday, seven insiders reported selling a total of 2.6 million shares for $18.1 million, all regular sales. The major sellers were CEO Robert Pedersen (345,200 shares) and co-founders of its subsidiary iFrogz, Scott Huskinson (986,397 shares) and Clay Broadbent (986,397 shares). Overall, insiders reported selling only a total of 2.66 million shares in the past year. ZAGG trades at 11-12 forward P/E and 2.8 P/B compared to the averages of 18.9 and 2.2 for its peers in the miscellaneous electronics products group.

On top of these, some additional large trades included a $1.9 million sale by CTO Patrick Melampy at session delivery network solutions provider Acme Packet Inc. (APKT); a $7.3 million sale by CEO JW Marriott Jr. in hotel chain Marriott Intl Inc. (MAR); a $62.2 million sale by Eddie Lampert's $12 billion hedge fund RBS Partners in auto parts store nationwide retail chain Autozone Inc. (AZO), in which he held $2.95 billion at the time of its 13-F Q3 filing; a $13.7 million sale by insiders including CEO James Carlson, CFO James Truess and Director Uwe Reinhardt in managed healthcare services provider Amerigroup Corp. (AGP).

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. The rest of the series by sector and by week can be accessed from our author page.

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 maybe 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 they have 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.

Credit: Fundamental data in this article were based on SEC filings, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

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

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