Analyzing Monday's Noteworthy Insider Buys And Sells

by: GuruFundPicks

Insiders reported on Monday that they bought and sold stock in over 170 separate transactions in over 80 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 170 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 on Monday; notable based on the dollar amount sold, the number of insiders selling, and based on whether the overall buying or selling represents a strong pick-up based on historical buying and selling in the stock (for more info on how to interpret insider trades, please refer to the end of this article):

Broadcom Corp. (BRCM): BRCM provides a portfolio of system-on-a-chip (SoC) and software solutions for wired and wireless communications to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. On Monday, five insiders filed SEC Forms 4 indicating that they sold a total of 66,337 shares for $2.3 million, all under 10b5-1 plans, and with some of the shares sold resulting from the exercise of options. This included Chief Technical Officer Henry Samueli, EVP & GM Robert Rango, Director John Major, and Director William Morrow. Overall, insiders sold a total of 1.2 million shares in the past year. BRCM trades at a discount 12-13 forward P/E compared to the 14.4 average for its peers in the communications semiconductor group, while earnings are projected to fall slightly from $2.76 in 2010 to $2.75 in 2012.

Mosaic Inc. (NYSE:MOS): The Mosaic Company is one of the world's leading producers and marketers of concentrated phosphate and potash crop nutrients for the global agriculture industry. On Monday, Director Harold Mackay filed SEC Form 4 indicating that he exercised options and sold the resulting 13,950 shares for $0.8 million. Overall, insiders sold no shares in the last three months and 0.16 million share in the past year. MOS has been weak this year, down about 30% in the past year, and it trades at 10-11 forward P/E and 2.1 P/B compared to averages of 10.1 and 3.6 for its peers in the fertilizer group, while earnings are projected to increase from $4.38 in 2011 to $5.25 in 2013 at an annual growth rate of 9.5%.

Centurylink (NYSE:CTL): CTL is an integrated communications company that provides a range of communications services, including voice, Internet, data, and video services in the continental U.S. On Monday, President William Cheek filed SEC Form 4 indicating that he exercised options and sold the resulting 16,831 shares for $0.64 million, pursuant to a 10b5-1 plan. Overall, insiders sold a total of 0.55 million shares in the past year. CTL trades at 14-15 forward P/E and 1.1 P/B compared to averages of 25.9 and 1.1 for its peers in the national wireless group.

Vertex Pharmaceuticals (NASDAQ:VRTX): VRTX is engaged in the discovery, development, and commercialization of small molecule drugs for the treatment of hepatitis C, inflammatory and autoimmune disorders. On Monday, four insiders filed SEC Forms 4 indicating that they sold a total of 26,316 shares for $1.0 million, pursuant to 10b5-1 plans. The selling insiders included CFO Ian Smith, EVP Nancy Wysenski, SVP Lisa Kelly, and SVP Amit Sachdev. Overall, insiders sold a total of 56,915 shares in the past three months and 0.52 million shares in the past year.

ZIOPHARM Oncology Inc. (NASDAQ:ZIOP): ZIOP is a development-stage biotech company engaged in the development and commercialization of in-licensed cancer drugs in North America. On Monday, Director and 10% owner Randall Kirk, also the CEO & Chairman of the Board of ZIOP's partner company Intrexon Corp., filed SEC Form 4 that he purchased 1.9 million shares for $10.0 million on the behalf of Intrexon Corp. Director Kirk is one of Virginia's wealthiest residents, with a net worth estimated by Forbes at $1.6 billion in 2009.

On top of these, some additional large insider trades last week included a $2.7 million sale by co-founder David Filo at Yahoo! Inc. (NASDAQ:YHOO); a $1.3 million sale by SVP Murray Goldberg at Regeneron Pharmaceuticals Inc. (NASDAQ:REGN); a $2.7 million sale by Chairman & CEO Michael Mussallem at Edwards Lifesciences Corp. (NYSE:EW); a $0.8 million sale by VP of Engineering & CTO Robert Dobkin at Linear Technology Corp. (NASDAQ:LLTC); a $1.8 million sale by founder John Hendricks at Discovery Communications, Inc. (NASDAQ:DISCA); a $1.8 million sale by EVP James Mosch at Dentsply International Inc. (NASDAQ:XRAY); and a $1.2 million sale by Director Peter Van Camp at Equinix Inc. (NASDAQ:EQIX).

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 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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