We present here one noteworthy buy and three noteworthy sells in the healthcare and technology sectors from Wednesday's (March 7th, 2012) SEC Form 4 (insider trading) filings, as part of our daily and weekly coverage of insider trades. These were selected by a review of over 400 separate transactions in over 220 different companies filed by insiders on Wednesday. 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):
Viropharma Inc. (VPHM): VPHM develops products for the treatment of diseases impacting patients with few if any treatment options, including drugs for hereditary angioedema, clostridium difficle infection and seizures in children and adolescents. On Wednesday, two insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 215,300 shares for $7.0 million. Of these, the large majority were sold by VP Thomas Doyle (210,000 shares), and he ended with 52,444 shares after the sale (not including derivative securities). In comparison, insiders sold 0.6 million shares in the past year.
VPHM shares are taking a breather this week after a strong rally that has catapulted shares almost 100% in the last six months, The company on Tuesday morning released positive data from its phase 2 subcutaneous trial of Cinryze in combination with Halozyme's Enhanze drug delivery technology for the treatment of patients with hereditary angioedema. However, shares have retreated following the announcement, triggered perhaps by concerns expressed by Stifel Nicolaus about logistical issues related to manufacturing capacity and cost that could pop up before twice-per-week dosing becomes a feasible option.
In its latest Q4 report, released at the end of February, its earnings handily beat analyst estimates, while revenues and forward FY revenue guidance were in-line. Currently, its shares trade at a current 14.5 P/E and 2.3 P/B compared to averages of 13.3 and 3.0 for its peers in the medical drugs group, while earnings are projected to drop precipitously from $2.07 in 2011 to $1.67 in 2012, and then rebound to $1.89 in 2013. We believe that current valuations are too rich, and the stock most likely may have begun a consolidation pattern earlier this week as it approached its long-term highs from 2001.
Brocade Communications Systems Inc. (BRCD): BRCD is an innovative network solutions provider that helps organizations worldwide transition smoothly to a virtualized world where applications as information can reside anywhere, by providing data center networking and storage area networking solutions. On Wednesday, two insiders filed SEC Forms 4 indicating that they sold 358,596 shares for $2.0 million. The large majority of the shares (324,169 shares) were sold by VP Tyler Wall, of which 300,000 shares were acquired by the exercise of options.
BRCD reported a solid Q4 last month, beating analyst earnings (20c v/s 13c) and revenue estimates ($561 million vs. $542 million). However, it guided revenues and earnings lower for Q2 (April). Its shares as a result have been flat since the report, and they currently trade at 9-10 forward P/E and 1.2 P/B compared to averages of 24.9 and 2.4 for its peers in the computer networks group.
Pandora Media Inc. (P): Pandora is a premier provider of Internet radio in the U.S., offering listeners streaming music based on analysis of user listening behavior. Its services are offered on traditional computers and on smart phones such as Android phones, BlackBerry's and the iPhone. On Wednesday, San Francisco-based Walden Venture Capital, an insider by virtue of being a 10% owner, filed SEC Form 4 that it sold 1.0 million shares for $14.7 million, ending with 43.7 million shares after the sale. This is on top of the heavy selling by corporate insiders that we reported just yesterday.
Pandora shares have been hammered, down over 20% in the last two days, after it reported a disappointing Q4 on Tuesday, missing analyst revenue and earnings estimates, and guiding lower. While the reaction of this "story" stock that trades at a hefty multiple to sales (8x prior to the Q4 report) is predictable, as we argued in detail in a prior article (hyperlinked above), the critical question for investors is where does it go from here, and maybe even what implications does it have for its peer Sirius Satellite Radio (SIRI). We would postulate that it is likely given the strong underlying fundamentals combined with the weak technical action, the stock is very likely to trade in the $10-$13 range for the time being. Also, regarding SIRI, we continue to believe that despite the optimism of many SIRI bulls, Pandora's recent Q4 shortfall does not translate into any net positives for SIRI.
Avanir Pharmaceuticals (AVNR): AVNR develops therapeutic products for the treatment of central nervous systems disorders of high unmet medical need.. On Wednesday, three insiders filed SEC Forms 4 indicating that they purchased 18,000 shares for $47,359. Insider buying is rare at AVNR, and in fact this is the only insider buying in the last two years.
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 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.