Analyzing Thursday's Noteworthy Insider Trades

by: GuruFundPicks

We present here noteworthy buys and sells from Thursday's (March 15th, 2012) SEC Form 4 (insider trading) filings (ex-healthcare and tech sectors that are covered in a separate article, hyperlinked above), as part of our daily and weekly coverage of insider trades. These were selected by a review of over 415 separate SEC Form 4 transactions filed by insiders on Thursday. 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):

Arch Coal Inc. (ACI): ACI is engaged in the production of steam and metallurgical coal from surface and underground mines. On Thursday, two insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 130,300 shares for $1.6 million, pursuant to 10b5-1 plans, with the selling insiders being COO John Eaves (71,900 shares) and SVP Robert Jones (58,400 shares). In comparison, insiders sold 0.31 million shares in the past year.

ACI announced last month that current Chairman & CEO Steven Leer would retire on April 26th, being replaced by current COO John Eaves. Also, earlier last month, on February 10th, ACI reported a disappointing Q4, missing earnings and revenue estimates, and more importantly projecting softening market demand, especially in the thermal coal market as utilities increasingly shift to natural gas due to cost advantages. Its shares as a result have dropped off over 15% since the Q4 report, and currently trade at 9-10 forward P/E and 0.7 P/B compared to averages of 10.7 and 2.0 for the coal mining group, while earnings are projected to increase at 11.5% compound growth rate from $1.07 in 2011 to $1.33 in 2013. Analyst estimates for FY 2013, however, have dropped off a cliff from $3.07 just 90 days ago to $1.33 now, and the stock may indeed have more room on the downside if the pickup in metallurgical coal demand does not pan out and/or the demand for thermal coal drops even further.

CVS Caremark Corp. (NYSE:CVS): CVS is a leading integrated pharmacy services provider in the U.S. It includes the nation's largest pharmacy chain with over 7,100 pharmacy drugstores in 41 states and D.C. Also, it provides pharmacy benefit management services to employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans, as well as to individuals. On Thursday, EVP Douglas Sgarro filed SEC Form 4 indicating that he exercised options to acquire 456,713 shares, and sold those and an additional 198,228 shares for $29.5 million, pursuant to a 10b5-1 plan. In comparison, insiders sold 1.18 million shares in the past year.

CVS reported an in-line Q4 last month, and its shares trade at all-time highs, at a discount 12-13 forward P/E and 1.5 P/B compared to averages of 14.9 and 3.1 for its peers in the retail drug stores group, while earnings are projected to rise at a 14.6% compound growth rate from $2.80 in 2011 to $3.68 in 2012.

Ford Motor (NYSE:F): Ford manufactures automobiles under the Ford and Lincoln nameplates, offers a wide range of after-sales vehicle services and products, and also offers vehicle financing, leasing and insurance services. On Thursday, two insiders filed SEC Forms 4 indicating that they sold 405,805 shares for $5.3 million. The majority of the shares were sold by Group VP James Farley, who exercised options and sold the resulting 330,805 shares for $4.3 million. In comparison, insiders sold 1.57 million shares in the past year. Ford reported a disappointing Q4 in January, missing analyst earnings estimates (20 cents v/s 26 cents), but beating revenue estimates ($34.6 billion v/s $32.2 billion). Its shares have been flat and in a narrow consolidation pattern since the report, trading at a current 6.4 P/E and 3.2 P/B compared with averages of 11.1 and 4.2 for its peers in the domestic auto group.

Walt Disney Company (NYSE:DIS): DIS is a diversified worldwide entertainment company that operates theme parks and resorts, produces filmed entertainment, operates broadcast radio & TV networks, and licenses, publishes and sells toy, books, etc. based on Disney characters. On Thursday, two insiders filed SEC Forms 4 indicating that they sold 96,100 shares for $4.1 million, pursuant to 10b5-1 plans. The majority of the shares sold by Sr. EVP Alan Braverman, who exercised options and sold the resulting 87,000 shares for $3.7 million. In comparison, insiders sold 0.48 million shares in the past year. DIS shares have been strong recently, up over 50% from the lows last October, and they trade at 12-13 forward P/E and 2.2 P/B compared to averages of 11.3 and 1.8 for its peers in the media conglomerate group.

On top of these, some additional large insider sales reported on Thursday included:

  • a $90.8 million sale by Chairman & CEO Howard Schultz at Starbucks Corp. (NASDAQ:SBUX), that operates over 17,000 coffee shops worldwide, including over 11,000 stores in the U.S., with the majority of the sales (130,218 shares out of 153,718 shares) by CFO Troy Alstead;
  • a $7.8 million sale by four insiders at United Rentals Inc. (NYSE:URI), one of North America's largest equipment rental companies, offering equipment rentals and sales via over 500 locations in the U.S. and Canada;
  • a $7.7 million sale by two insiders at Prologis Inc. (NYSE:PLD), a REIT that acquires, develops and operates industrial properties in North America, Europe and Asia, with 61,169 shares sold pursuant to a 10b5-1 plan by CEO of Private Capital, Guy Jaquier;
  • a $2.4 million sale by EVP David Cohen, pursuant to a 10b5-1 plan, at Comcast Corp. (NASDAQ:CMCSA), a provider of cable services and content to 22.8 million subscribers in 39 states;

Furthermore, insiders also reported noteworthy buys on Thursday in:

  • Pennymac Mortgage Investment Trust (NYSE:PMT), a REIT that primarily invests in residential mortgage loans and mortgage-related assets, in which Director Scott Carnahan purchased 10,000 shares for $0.19 million.

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.