Insiders reported on Tuesday that they bought and sold stock in over 360 separate transactions in over 210 different companies. These transactions have to be reported within two days of the trade, so the transactions occurred sometime after mid-week last week. We culled through these 360 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 Tuesday (ex-healthcare and technology sectors that were discussed separately in a prior article), 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).
Equity Residential (EQR): EQR is a REIT engaged in acquiring, developing, owning and managing multi-family properties located in the U.S. On Tuesday, four insiders filed SEC Forms 4 indicating that they sold 83,885 shares for $5.0 million. Most of the shares sold were by CEO David Neithercut (69,210 shares) and EVP David Santee (12,817 shares), with the shares sold by Mr. Neithercut resulting from the exercise of options. In comparison, insiders sold a total of 0.14 million shares in the past six months, and 1.5 million shares in the past year. EQR reported an in-line Q4 just last Wednesday, and it trades at forward price to funds from operations (P/FFO) ratio of 20.1 compared to the average of 17.9 for its peers in the REIT Equity Trust group. Also, it has a dividend yield of 3.8% compared to the 3.5% average for the group.
P/FFO is a more appropriate measure of value, commonly used in the REIT group, as it adds back in depreciation expenses that are typically taken out in calculating net income and earnings. This is because real estate, unlike fixed PP&E costs in the case of other groups, rarely loses value over the long-term, and in fact, most often appreciates over the long-term. So, in this case spreading out the investment cost in PP&E (in this case, mostly real estate) charges over the long-term makes little sense as is done in calculating net income. Hence, depreciation is added back in and the resulting FFO is a more appropriate measure of the cash flows than is earnings.
Gap Inc. (GPS): GPS operates 3,246 Gap, Old Navy and Banana Republic apparel stores worldwide. On Tuesday, two insiders filed SEC Forms 4 indicating that they sold a total of 0.51 million shares for $11.1 million. This included CFO Sabrina Simmons exercising options and selling the resulting 50,000 shares, pursuant to a 10b5-1 plan; and Former President of Old Navy, John Wyatt, exercising options to acquire 387,500 shares and selling those and an additional 75,814 shares. GPS last Thursday reported better than expected same-store sales (-4.0% v/s -5.1%) and guided EPS higher. The stock since has surged over 10%, and currently trades at 12 forward P/E and 4.0 P/B compared to averages of 16.0 and 3.1 for its peers in the retail apparel and shoe group.
Fastenal Co. (FAST): FAST is a wholesaler and retailer of industrial and construction supplies sold through 2,566 stores in the U.S., Canada, Mexico, the Dominican Republic, Puerto Rico, Singapore and China. On Tuesday, CEO Willard Oberton filed SEC Form 4 indicating that he sold 40,000 shares for $1.9 million, ending with 0.41 million shares in direct and 0.14 million shares in indirect holdings. Overall, insiders sold a total of 0.66 million shares in the past year. FAST shares have been extremely strong lately and trade at all-time highs, up over 55% in the past year. They trade at a premium 27-28 forward P/E and 9.7 P/B compared to averages of 14.1 and 2.1 respectively for the building products retail and wholesale group.
On top of these, some additional large insider sales on Tuesday included a $1.3 million sale by VP, Controller and Chief Accounting Officer Robert Blanchard at oil and gas equipment, component and products company National Oilwell Varco (NOV); a $1.9 million sale by SVP Sujeet Chand at industrial automation control and power systems manufacturing company Rockwell Automation Inc. (ROK); a $2.4 million sale by President Geraud Darnis at industrial conglomerate United Technologies Corp. (UTX); and a $1.7 million sale by EVP Roy Templin at Whirlpool Corp. (WHR), a manufacturer of consumer washers and dryers, refrigerators and freezers, dishwashers, and other household appliances. Also, insider bought shares in coal exploration and production company Patriot Coal Corp. (PCX), with Director Robert Viets filing SEC Form 4 indicating that he purchased 2,000 shares for $18,320, the first insider buy since September of last year; and electric utility company Xcel Energy (XEL), with Director James Sheppard filing SEC Form 4 indicating that he purchased 1,000 shares for $26,427, the first insider buy since August of last year.
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% or 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, 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.
