Analyzing Wednesday's Noteworthy Insider Trades

by: GuruFundPicks

We present here three noteworthy insider buys and five noteworthy insider sells from Wednesday's (April 18th, 2012) over 220 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):

Comcast Corp. (NASDAQ:CMCSA): CMCSA provides cable services and content to 22.8 million subscribers in 39 states, as well as Internet and phone services. On Wednesday, Chairman of the Board and CEO Brian Roberts filed SEC Form 4 indicating that he sold 105,495 shares for $3.2 million, pursuant to a 10b5-1 plan, ending with 0.24 million shares in direct and 12.27 million shares in indirect holdings after the sale. Insider selling has been intense recently at CMCSA, with insiders selling 0.25 million shares so far in April and 0.62 million shares in March and another 0.46 million shares in February. In comparison, insiders sold only an additional 0.03 million shares during the remainder of the past year.

CMCSA shares have been trading in a tight trading range for the last eight weeks, after a sharp rally earlier in the year carried them up 25% YTD. Its shares currently trade at 13-14 forward P/E and 1.7 P/B compared to averages of 15.5 and 7.7 for its peers in the cable TV group, while earnings are projected to increase from $1.58 in 2011 to $2.18 in 2013 at an annualized growth rate of 17.5%.

Fusion-IO Inc. (NYSE:FIO): FIO is engaged in the development, marketing and sale of storage memory platforms for data centralization in the U.S. Its platforms enhance the processing capabilities within a datacenter by relocating process-critical or active data from centralized storage to the server where it is being processed. On Wednesday, four insiders filed SEC Forms 4 indicating that they exercised options to purchase 174,405 shares, and sold those and an additional 20,000 shares for $5.4 million, pursuant to 10b5-1 plans, with COO Lance Smith selling 95,030 of those shares.

FIO shares trade at a very premium current 73 P/E, on a TTM basis, compared to the 16.6 average for its peers in the computer storage devices group. However, the Street is extremely bullish on the company, including recent positive statements from Morgan Stanley and CSFB last month. Both reiterated their overweight/outperform rating on the stock. While current fundamentals do not support the high valuation, the bullishness is based on the excellent long-term prospects for the firm's technology in helping enterprises manage the ever-increasing huge amounts of data that are being constantly generated and that need to be processed to help them monetize their business models. The company counts Apple Inc. (NASDAQ:AAPL) and Facebook (NASDAQ:FB) among its largest customers. Furthermore, shares have also been buoyed by rumors that the company could be acquired by Intel Corp. (NASDAQ:INTC) at valuations of well over $40, significantly above current prices in the $27 range.

Sirius XM Radio (NASDAQ:SIRI): SIRI provides satellite radio services in the U.S. and Canada via approximately 135 channels of commercial-free music, sports, news, talk, traffic and weather on a subscription basis. On Wednesday, CEO Mel Karmazin filed SEC Form 4 indicating that he exercised options and sold the resulting 11.5 million shares for $25.3 million, pursuant to a sales plan, and ending with 8.5 million shares in direct and an additional 0.3 million shares in indirect holdings after the sale (not including derivative holdings). In comparison, insiders sold 28.3 million shares in the past year.

SIRI shares have recently been in an uptrend, up just under 25% YTD, rising in a stair-step fashion, that is, consolidating in a tight range, breaking out and then forming a new tight consolidation range above the previous one. The company is in a fight for independence, as speculation rises that its largest owner Liberty Media (NASDAQ:LMCA) may buy out the 60% of shares that it does not already own. We believe that SIRI is mostly an acquisition play at this point, as with earnings staying generally in the 1c-2c range, it looks unlikely that shares will rise much beyond the long-term highs in the $2.40s on the strength of current fundamentals, save a buy-out premium.

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

  • a $1.6 million sale by two insiders at Seagate Technology (NASDAQ:STX), that manufactures hard disk drives for the enterprise, desktop, mobile computing and consumer electronics markets; and
  • a $1.1 million sale by SVP Kristin Rappe at electric and gas utility Wisconsin Energy Corp. (NYSE:WEC), that provides services in WI and MI.

Furthermore, insiders also reported noteworthy buys on Wednesday in:

  • EV Energy Partners (NASDAQ:EVEP), an MLP engaged in the acquisition, development and production of oil and natural gas properties in the continental U.S., in which Executive Chairman of the Board John Walker purchased 10,000 shares for $0.6 million, increasing his holdings to 0.87 million shares, and in comparison to just an additional 2,000 shares purchased by insiders in the past year;
  • Winmark Corp. (NASDAQ:WINA), a franchisor of retail store concepts that buy, sell, trade and consign merchandise, in which Chairman and CEO John Morgan purchased 10,000 shares for $0.52 million, in comparison to 40,142 shares purchased by insiders in the past year; and
  • Valhi Inc. (NYSE: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 1,000 shares for $53,000, in comparison to 0.10 million shares purchased by insider in the last six months.

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.

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.