Analyzing Tuesday's Noteworthy Insider Trades

by: GuruFundPicks

We present here two noteworthy insider buys and ten noteworthy insider sells from Tuesday's (April 24th, 2012) over 160 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):

Danaher Corp. (NYSE:DHR): DHR is a manufacturer of water treatment and vapor recovery systems, fuel dispensers, digital imaging systems and test products. On Tuesday, CEO Lawrence Culp filed SEC Form 4 indicating that he exercised options to acquire 302,856 shares, and sold those and an additional 123,600 shares for $22.4 million, pursuant to a 10b5-1 plan. In comparison, insiders sold 1.2 million shares in the past year. DHR reported its Q1 last Thursday, in which it reported in-line revenues and beat analyst earnings estimates (73c v/s 71c), while raising the low end of its FY 2012 EPS. The stock is up about 14% YTD, and trades at 14-15 forward P/E and 2.1 P/B compared to averages of 13.3 and 1.7 for its peers in the diversified conglomerates group.

US Airways Group Inc. (LCC): LCC is a holding company primarily for US Airways, an air carrier engaged in transporting passengers, cargo and mail. On Tuesday, two insiders filed SEC Forms 4 indicating that they sold 19,674 shares for $0.18 million, pursuant to 10b5-1 plans. Insider selling is uncommon at LCC, and in fact, insiders sold only an additional 1,041 shares over the past year.

LCC shares have drifted lower after early morning strength, now down about 8% from those highs, after the company reported its Q1 (March) earlier this morning, in which it beat analyst revenue ($3.27 billion v/s $3.25 billion) and earnings estimates (13c loss v/s 23c loss). Its shares have almost doubled YTD, fueled by a strong Q4 (December) as well as merger speculations with rivals AMR Corp. and Delta Air Lines (NYSE:DAL). Its shares currently trade at 3-4 forward P/E and 10.1 P/B compared to averages of 8.6 and 1.9 for its peers in the airline group.

PNC Financial Services Group (NYSE:PNC): PNC operates as a diversified financial services company, offering retail banking, corporate and institutional banking, asset management and residential mortgage banking services, via 2,470 branches in PA, NJ, DE, Washington D.C., and 10 other states. On Tuesday, five insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 88,507 shares for $5.8 million. Of these, Senior Vice Chairman Joseph Guyaux sold 46,724 shares, all pursuant to a 10b5-1 plan. In comparison, insiders sold 0.47 million shares in the past year.

PNC reported its Q1 (March) last Wednesday, slightly beating analyst revenue and earnings estimates ($1.44 v/s $1.43); its shares trade at 9-10 forward P/E and 1.0 P/B compared to averages of averages of 10.3 and 0.9 for its peers among major regional banks.

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

  • A $24.3 million sale by Chairman Charles Schwab at Schwab Charles Corp. (NYSE:SCHW), a provider of brokerage, banking and financial services to individual and institutional clients;
  • A $7.7 million sale by three insiders at UnitedHealth Group Inc. (NYSE:UNH), that is a diversified health and well-being company, serving more than 70 million Americans;
  • A $6.3 million sale by three insiders at Seagate Technology (NASDAQ:STX), that manufactures hard disk drives for the enterprise, desktop, mobile computing and consumer electronics markets;
  • A $4.3 million sale by Chairman of the Board JW Marriott Jr. and Richard Marriott at hotel chain Marriott International (NYSE:MAR);
  • A $3.9 million sale by CEO John De Merritt, at Francesca's Holdings Corp. (NASDAQ:FRAN), that operates a specialty retail chain of women's apparel boutique stores in 38 states targeting fashion-conscious 18 to 35 year olds, sold as part of the underwritten public offering completed on April 23rd;
  • A $1.7 million sale by EVP Paul Cormier at Red Hat Inc. (NYSE:RHT), a provider of open source enterprise operating systems and related systems management services based on Linux; and
  • A $1.6 million sale by Vice Chairman Richard Payne at US Bancorp (NYSE:USB), that is a super-regional financial services holding company, operating full-service branch offices and ATMs, and providing a full range of banking and financial services including brokerage, insurance, investment, mortgage, trust and payment services to individuals, institutions and corporations.

Furthermore, insiders also reported noteworthy buys on Tuesday in:

  • Retractable Technologies Inc. (NYSEMKT:RVP), a developer and marketer of innovative patented safety needle devices for the healthcare industry, in which CEO Thomas Shaw purchased 50,000 shares for $63,500, the only insider purchase at least in the last two years; and
  • Zep Inc. (NYSE:ZEP), a provider of a wide range of cleaning and maintenance products and services for commercial, industrial, institutional and consumer applications, in which Chairman and CEO John Morgan purchased 7,500 shares for $102,900, the only insider purchase 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 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.