Analyzing Wednesday's Noteworthy Insider Trades

by: GuruFundPicks

We present here three noteworthy buys and 11 noteworthy sells from Wednesday's (March 21st, 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 315 separate SEC Form 4 transactions 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):

Gap Inc. (NYSE:GPS): GPS operates 3,246 Gap, Old Navy and Banana Republic apparel stores worldwide. On Wednesday, EVP Gavin Sage filed SEC Form 4 indicating that he exercised options to acquire 226,250 shares and sold those and an additional 42,732 shares for $7.0 million, ending with no shares after the sale (not including derivative holdings). Insider selling has picked up recently at GPS, with 0.65 million shares reported sold so far in March, in addition to the 0.63 million shares reported sold in the entire month of February. In comparison, insiders sold only an additional 0.08 million shares in the remaining 10 months of the past year.

The acceleration in insider selling activity is happening at a time when GPS shares have strongly rallied, up over 40% YTD, on the back of a good Q4 report last month in which it reported better than expected same-store sales (-4.0% v/s -5.1%) and guided EPS higher. Also, industry fundamentals are also looking favorable as cotton continues to trade near its lows, which will benefit the bottom-line of GPS and other apparel retailers. GPS shares currently trade at 13 forward P/E and 4.6 P/B compared to averages of 16.0 and 3.1 for its peers in the retail apparel and shoe group.

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 Wednesday, EVP Michael Bannister filed SEC Form 4 indicated that he exercised options to acquire 256,667 shares and sold those and an additional 81,777 shares for $4.3 million. Insiders at Ford have been aggressively selling recently, with a total of 1.2 million shares sold by five insiders this month, to-date, including the 0.33 million shares we reported on last week. In comparison, Ford insiders sold only an additional 0.8 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.

Ross Stores Inc. (NASDAQ:ROST): ROST operates 1,037 Ross Dress for Less stores, the largest off-price apparel and home fashion retail chain in the U.S. and Guam, and it operates 88 dd's Discounts stores in seven states that feature a more moderately-priced assortment of first-quality, in-season, name brand apparel, accessories, footwear and home fashion for the entire family. On Wednesday, two insiders filed SEC Forms 4 indicating that they sold 0.28 million shares for $15.9 million. The large majority (0.26 million shares) of the sales was by vice chairman and CEO Michael Balmuth, ending with 0.54 million shares after the sale (not including derivative securities). In comparison, insiders sold 0.76 million shares in the past year.

ROST has been arguably the strongest long-term performer among large-cap retailers, rising six-fold just in the past decade when many of its peers have flat-lined at best. It reported an in-line Q4 last week, and its shares are currently at all-time highs, trading at 15-16 forward P/E and 8.5 P/B compared to averages of 15.2 and 3.7 for its peers in the discount retail group, while earnings are projected to rise at 13.4% annual rate from $2.86 in 2012 to $3.68 in 2014.

DDR Corp. (NYSE:DDR): DDR is a REIT that acquires, develops, leases and manages shopping centers, mini-malls and lifestyle centers across the U.S. On Wednesday, CEO Daniel Hurwitz filed SEC Form 4 indicating that he sold 39,099 shares for $0.6 million. This is in addition to the sale of $0.9 million by three insiders last week, and in total four insiders have reported selling 0.11 million shares so far this month. In comparison, insiders sold 0.60 million shares in the past year. DDR reported an in-line Q4 last Thursday, and its shares trade at a current 15.0 P/E and 1.5 P/B compared to averages of 14.2 and 1.3 for its peers in the equity trust REIT group (that includes retail and other REITs).

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

  • A $6.3 million sale by Director Antonio Gracias, pursuant to a 10b5-1 plan, at Tesla Motors Inc. (NASDAQ:TSLA), a manufacturer of high-performance fully electric vehicles and advanced electric vehicle power-train components;
  • A $3.0 million sale by EVP James Morris at Western Digital Corp. (NYSE:WDC), that manufactures hard disk drives for the enterprise, desktop, mobile computing and consumer electronics markets;
  • A $2.1 million sale by seven insiders, to satisfy tax withholding requirements after the acquisition of shares from the exercise of options, at Ariad Pharmaceuticals Inc. (NASDAQ:ARIA), engaged in the development of drugs that treat aggressive and advanced-stage cancer by regulating cell signaling with small molecules, and also developing small-molecule drugs that block signal transduction pathways in cells responsible for osteoporosis and immune and inflammatory diseases;
  • A $2.0 million sale by two insiders, pursuant to 10b5-1 plans, at Mako Surgical Corp. (NASDAQ:MAKO), that develops proprietary advanced robotic arm solutions and orthopedic implants used in minimally invasive orthopedic knee procedures;
  • A $1.4 million sale by CEO Richard Wallace, pursuant to a 10b5-1 plan, 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;
  • A $1.2 million sale by two insiders at Macerich Co. (NYSE:MAC), a REIT that is engaged in the acquisition, ownership, development, redevelopment, management and leasing of regional and community shopping centers;
  • A $1.2 million sale by two insiders at Analog Devices (NYSE:ADI), that is engaged in the design, manufacture and technical support of analog, mixed-signal and digital signal processing integrated circuits used in industrial, automotive, consumer, communication and computer applications; and
  • A $1.1 million sale by Director Joseph Goldstein, pursuant to a 10b5-1 plan, at Regeneron Pharmaceutical (NASDAQ:REGN), a developer of medicines for the treatment of serious medical conditions, with two products, ARCALYST and EYLEA, on the market, and additional in development to treat inflammatory conditions, allergic and immune conditions, and cancer.

Furthermore, insiders also reported noteworthy buys on Wednesday in:

  • Quidel Corp. (NASDAQ:QDEL), a developer of rapid point-of-care diagnostic testing solutions for applications in infectious diseases, women's health and gastrointestinal diseases, in which two insiders purchased 75,815 shares for $1.3 million, in comparison to 0.35 million shares purchased by insiders in the past two years;
  • TCF Financial Corp. (NYSE:TCB), a bank holding company for TCF National Bank that provides various retail and commercial banking products and services via over 400 branch locations in IL, MN, MI, CO, WI, AZ, IN and SD, in which Director Vance Opperman purchased 10,000 shares for $122,000, in comparison to 20,740 shares purchased in the past two years; and
  • National Fuel Gas Co. (NYSE:NFG), a holding company providing gas utility services to 728,700 customers in western NY and northwestern PA, in which Director R D Cash purchased 2,000 shares for $98,460, in comparison to 12,422 shares purchased in the past 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 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.

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