Analyzing Monday's Noteworthy Insider Trades

by: GuruFundPicks

We present here four noteworthy insider buys and six noteworthy insider sells from Monday's (April 9th, 2012) over 95 separate SEC Form 4 (insider trading) filings, as part of our daily and weekly coverage of insider trades. 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):

Comverse Technology Inc. (CMVT): CMVT is a provider of computer and telecom systems and software for multimedia communications and information processing applications, used in a broad range of applications by fixed and wireless telephone network operators, government agencies, call centers, financial institutions and other public and commercial organizations worldwide. On Monday, SVP Gabriel Matsliach filed SEC Form 4 that he sold 40,994 shares for $0.26 million, ending with 101,995 shares after the sale. This was the only insider sale in the past year.

CMVT just reported its Q4 (January) report last Tuesday, in which it missed analyst earnings (14c v/s 16c) and revenue estimates ($406 million v/s $427 million). Its shares currently trade at a current 16.1 P/E and 3.1 P/B compared to averages of 17.7 and 1.5 for its peers in the Communications Components group.

Nike Inc. (NKE): NKE is engaged in the design, development, marketing and sale of high-quality athletic footwear, apparel, equipment and accessories in 170 countries worldwide. On Monday, three insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 75,000 shares for $8.3 million, pursuant to 10b5-1 plans. In comparison, insiders sold 0.62 million shares in the past year.

NKE shares have been among the most steadiest long-term performers, currently trading at all-time highs and up over 10% YTD and up to five-fold in the last decade, powered higher by consistently rising earnings. In the most recent quarter, NKE beat analyst earnings estimates ($1.20 v/s $1.17), while reporting revenues in-line, and its shares currently trade at 18-19 forward P/E and 5.0 P/B compared to averages of 11.9 and 7.5 for its peers in the shoes and related apparel group.

Rare Element Resources (REE): REE is a Canadian company engaged in the acquisition and exploration of gold and rare-earth elements in North America. On Monday, Director Norman Burmeister filed SEC Form 4 indicating that he sold 98,769 shares for $0.6 million, ending with 0.28 million shares. Insider selling is rare at REE, and in fact the only other insider sale in the past two years was in December of 2011 when Mr. Burmeister sold 25,000 shares. Rare earth stocks, including REE and the leading stock in the group Molycorp (MCP), have been particularly volatile recently over speculation about M&A activity in the space and continued pricing volatility. While MCP is a prime beneficiary of such speculation, the impact on REE and its peer Avalon Rare Metals Inc. (AVL) is less clear as both are still in development stage.

On top of these, some additional large insider sales on Monday include:

  • A $1.8 million sale by two insiders at aerospace/defense company Transdigm Group Inc. (TDG); and
  • A $1.6 million sale by Director Mike Lynch at Williams-Sonoma Inc. (WSM), a specialty retailer of products for the home, operating 592 home furnishings and accessories stores.

Furthermore, insiders also reported noteworthy buys on Monday in:

  • Keryx Biopharmaceuticals (KERX), a developer of novel pharmaceutical products to treat cancer, renal disease and other life-threatening diseases, in which Director Michael Tarnok purchased 17,500 shares for $27,125, in addition to the purchase of $98,531 by CEO Ron Bentsur last week, and in comparison to 55,000 shares purchased by insiders in the last year;
  • Owens Illinois Inc. (OI), that manufactures glass containers for the food, beverage and pharmaceutical markets, in which two insiders purchased 1,767 shares for $39,039, in comparison to 1,979 shares purchased by insiders in the last six months;
  • Valhi Inc. (VHI), engaged in the manufacture of titanium dioxide products and component products in security, furniture, performance marine and waste management industries, in which Chairman of the Board Harold Simmons purchased 4,000 shares for $0.2 million, in comparison to 0.10 million shares purchased in the last six months; and
  • Winmark Corp. (WINA), a franchisor of retail store concepts that buy, sell, trade and consign merchandise, in which Chairman and CEO John Morgan purchased 6,000 shares for $329,100, compared to 26,142 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 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 am long MCP.

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.