Analyzing Monday's Noteworthy Insider Buys And Sells

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Includes: BAC, CHTP, KLAC, MSFT, PLCM, QRVO, SCHW, SGEN, SO, T
by: GuruFundPicks

Insiders reported on Monday that they bought and sold stock in over 200 separate transactions in over 120 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 200 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).

Southern Co. (NYSE:SO): SO is a holding company engaged in generation, transmission and distribution of electricity to customers in AL, GA, FL, MS and NC. Insiders currently hold 0.02% of company shares. On Monday, CEO and Chairman Thomas Fanning filed SEC Form 4 indicating that he exercised options and sold the resulting 275,617 shares for $12.4 million, ending with 985 shares in direct and 10,301 shares in indirect holdings after the sale. Overall, during the past year, insiders sold 1.3 million shares. SO just last week reported Q4, with EPS in-line (30c) and revenues missing consensus ($3.7 billion v/s $4.0 billion). Its shares were almost flat for the week, and they currently trade at 16 forward P/E and 2.2 P/B compared to averages of 16.4 and 1.4 for the electric power utilities group.

Polycom Inc. (NASDAQ:PLCM): PLCM develops communication products that enable unified video, voice and content collaboration for enterprise, government, education and healthcare customers. On Monday, two insiders, CEO Andrew Miller (80,000 shares) EVP Sayed Darwish (9,000 shares), filed SEC Forms 4 indicating that they sold a total of 89,000 shares for $1.8 million, under 10b5-1 plans. Overall, insiders sold a total of 236,300 shares during the past year. PLCM just last week reported a strong Q4, in which it beat earnings (41c v/s 29c) and revenue ($407 million v/s $401 million) estimates, and the stock rode up 11.1% for the week. Its shares currently trade at a discount 13 forward P/E and 2.6 P/B compared to averages of 31.1 and 3.2 for the wireless equipment group.

Schwab Charles Corp. (NYSE:SCHW): SCHW provides brokerage, banking and financial services to individual and institutional clients. On Monday, Director Roger Walther filed SEC Form 4 indicating that he purchased 2,718 shares for $31,528. Overall, insiders purchased only an additional 1,500 shares in the past year, also by Director Walther in November of last year. SCHW reported its Q4 last week, on Wednesday, reporting both revenue and earnings in-line, with the stock down 9.1% for the week. Its shares currently trade near six-year lows, weak along with the rest of the financial sector, at a premium 14 forward P/E and 1.9 P/B compared to averages of 12.5 and 1.3 for its peers in the investment banking group.

RF Micro Devices Inc. (RFMD): RFMD manufactures radio frequency (RF) systems and solutions that drive mobile communications. Its applications are used in mobile devices, base stations, wireless LANs and advanced metering devices. On Monday, three insiders, EVP Jerry Neal (25,000 shares), VP Robert Van Buskirk (50,000 shares) and VP James Stilson (30,436 shares), filed SEC Forms 4 indicating that they sold a total of 105,436 shares for $0.5 million. Overall, insiders sold 0.28 million shares during the past three months, and 1.04 million shares in the past year. RFMD reported its Q3 (December) just last week, on Tuesday, with revenues in-line and earnings missing by 1c (2c v/s 3c), and guiding Q4 revenues and earnings below consensus. Its shares trade at 17-18 forward P/E and 2.1 P/B compared to averages of 31.1 and 3.2 for the wireless equipment group.

AT&T Inc. (NYSE:T): AT&T is a leading global telecommunications services provider, offering local exchange, long distance, network access, and wireless services to consumers, businesses and other service providers. On Monday, Group President of Corporate Strategy and Develop Forrest Miller filed SEC Form 4 indicating that he sold 66,279 shares for $1.9 million. AT&T has been almost flat during the last decade, and it currently trades at 11-12 forward P/E and 1.6 P/B compared to averages of 14.6 and 1.7 for the diversified communications group.

On top of these, some additional large insider trades last week included a $148 million sale by co-founder and director Bill Gates at Microsoft Corp. (NASDAQ:MSFT), pursuant to a 10b5-1 plan; a $5.7 million sale by two insiders, CEO Richard Wallace and SVP and Chief Accounting Officer Virendra Kirloskar, pursuant to 10b5-1 plans, at KLA Tencor Corp. (NASDAQ:KLAC), a provider of process control and yield management solutions for the semiconductor, LED, nano-electronics, data storage and solar market; and a $0.8 million sale, pursuant to a 10b5-1 plan, by Chief Medical Officer Thomas Reynolds at Seattle Genetics Inc. (NASDAQ:SGEN), a clinical biotech company focusing on the development of monoclonal antibody-based therapeutics for the treatment of cancer and autoimmune diseases. Also, two noteworthy buys included a $97,761 purchase by 10% owner Josiah Austin on behalf of his investment holding company El Coronado Holdings in Chelsea Therapeutics Intl (NASDAQ:CHTP), a clinical-stage biotech that is developing prescription products in multiple therapeutic categories such as rheumatoid arthritis (NYSE:RA), psoriasis, and other inflammatory conditions; and a $50,750 purchase by Director Donald Powell at Bank of America Corp. (NYSE:BAC).

General Discussion on Insider Trading

The reports in this series identify 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 10% 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 non-public 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 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.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our "opinions" and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

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