Analyzing Tuesday's Noteworthy Insider Buys And Sells

Includes: AIG, AXP, BYD, DUK, PG, RAI, SO, UL, V
by: GuruFundPicks

We present here three noteworthy buys and four noteworthy sells from Tuesday's SEC Form 4 (insider trading) filings (ex- the healthcare and technology sectors that were covered separately in a prior article hyperlinked to above), as part of our daily and weekly coverage of insider trades. These were selected by a review of over 350 separate transactions in over 210 different companies filed by insiders on Tuesday. The filings are noteworthy based on the dollar amount sold, the number of insiders buying or 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):

American Express Co. (NYSE:AXP): AXP provides charge and credit payment card products, travel-related services to consumers and businesses worldwide. On Tuesday, CEO Kenneth Chenault filed SEC Form 4 indicating that he exercised options to acquire 555,208 shares, and sold those and an additional 138,513 shares for $37.1 million, ending with 930,668 shares after the sale (not including derivative securities). In comparison, insiders sold 1.34 million shares in the past year.

AXP shares have rallied nicely off of the 2008/09 lows, and are currently trading near four-year highs. In the most recent Q4 reported last month, AXP beat analyst earnings ($1.01 v/s 99c) and missed on revenues. The shares have rallied well, up about 7% since the report, and they currently trade at 11-12 forward P/E and 3.3 P/B compared to averages of 12.8 and 1.9 for its peers in the miscellaneous financial services group, while earnings are projected to rise at a respectable 7.2% annual rate from $4.08 in 2011 to $4.69 in 2013. Perhaps more importantly, AXP shares also trade at a discount to its nearest competitor Visa Inc. (NYSE:V) that trades at a higher 16-17 forward P/E and 2.9 P/B; however, earnings growth at Visa is more impressive, projected to grow from $4.99 in 2011 to $6.96 at an annual 18.1% rate. Also, AXP offers a more attractive 1.3% dividend yield compared to Visa's 0.8%.

Duke Energy Corp. (NYSE:DUK): DUK provides electrical and natural gas utility services to about 4 million electric and 0.5 million gas customers in the Americas. On Tuesday, two insiders filed SEC Forms 4 indicating that they sold 95,891 shares for $2.0 million. The large majority of the shares were sold by Group Executive, Chief Legal Officer & Corporate Secretary Marc Manly, who indicating in the filing that he exercised options to purchase 38,476 shares and sold those and an additional 49,000 shares for $1.8 million. In comparison, DUK insiders sold 2.4 million shares in the past year. DUK shares have done well recently, up over 16% in the past year, trading near ten-year highs at a discount 14-15 forward P/E and 1.2 P/B compared with averages of 20.1 and 1.3 for its peers in the electric utilities group. Also, it yields an attractive 4.7% dividend yield, well above the 3.7% average for the group.

Procter & Gamble (NYSE:PG): With more than 250 products marketed to more than five billion consumers in 130 countries, PG is a global manufacturer of beauty care products, cleaning products, diapers, tissues, healthcare, toothpaste, snacks and beverages. It operates via five business segments: fabric and home care, paper, beauty care, healthcare, and food and beverage. On Tuesday, three insiders filed SEC Forms 4 indicating that they exercised options to acquire 56,178 shares, and sold 61,976 shares for $4.14 million. The sellers included Global Human Resources Officer Moheet Nagrath (32,162 shares), CTO Bruce Brown (22,194 shares) and Global Product Supply Officer Ioannis Skoufalos (7,620 shares). In comparison, insiders sold 0.12 million shares in the past year.

PG just last Thursday announced an aggressive cost cutting plan, targeting a reduction of 5,700 jobs and $10 billion in cost reduction by 2016, in a presentation by CEO Bob McDonald at the Consumer Analyst Group of New York conference in Boca Raton, FL. The stock has responded well, up about 5% or almost $10 billion in market-cap since the announcement, aided also by positive statements and/or upgrades from a number of brokers including Bank of America, ING, and BMO Capital. Its shares currently trade at 15-16 forward P/E and 2.9 P/B compared to averages of 13-14 and 4.8 for its closes peer Unilever Plc (NYSE:UL), a British-Dutch manufacturer of branded and packaged consumer goods, including food, detergents, and personal care products. With a 3.1% dividend yield, and impressive steady long-term performance at low risk, the stock is also a good 'widow-and-orphan stock', performing well on a relative basis even in bad economic times.

Reynolds American Inc. (NYSE:RAI): RAI manufactures cigarettes and other tobacco products primarily under the Camel, Doral and Kool brands. On Tuesday, British American Tobacco, beneficial owner of 240.8 million shares via Brown & Williamson Holdings Inc. (B&W), filed SEC Form 4 indicating that it sold 0.65 million shares for $26.6 million. This is in addition to the 0.82 million shares that they reported selling in an earlier filing just last week. Overall, insiders sold 4.29 million shares in the past year. RAI, along with many other tobacco stocks, has been trading in all-time high territory, and is up 24% over the past year and over 150% since the 2008/09 lows. Its shares currently trade at a premium 13 forward P/E and 3.8 P/B compared to averages of 11.9 and 13.8 for its peers in the tobacco group.

Furthermore, insiders also reported noteworthy buys on Tuesday in:

  • Boyd Gaming Corp. (NYSE:BYD), that operates as a multi-jurisdictional gamin company, operates 15 company owned and operated casino entertainment facilities in NV, MS, LA, IN, and NJ, in which Director Frederick Schwab purchased 10,183 shares for $84,712, out of a total 27,183 shares purchased by insiders in the past year;
  • Southern Co. (NYSE:SO), a holding company engaged in generation, transmission and distribution of electricity to customers in AL, GA, FL, MS and NC, in which Director William Smith purchased 513 shares for $22,874, out of a total of 1,470 shares purchased in the past year; and
  • American International Group (NYSE:AIG), a diversified insurance company that offers group and individual life insurance, annuities and general property and casualty insurance worldwide, in which Director Morris Offit purchased 15,000 shares for $0.42 million, out of a total of 41,000 shares purchased by insiders in the past year.

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, 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.

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.