We present here two noteworthy insider buys and four noteworthy insider sells from Monday's (April 30th, 2012) over 110 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):
Apple Inc. (AAPL): Probably among the most innovative companies the world has ever known, this maker of the iPhone, iPod and iPad, founded by the late Steve Jobs, is one of the world's largest manufacturers of personal computers, mobile communication devices and portable digital music players. On Monday, two insiders filed SEC Forms 4 indicating that they sold 104,151 shares for $62.9 million. Of these, SVP Scott Forstall sold 64,151 shares, and the remaining 40,000 shares that were acquired by the exercise of options were sold by Director Millard Drexler. Insider selling at AAPL has picked up significantly in recent months as the stock continues to climb higher, with insiders selling 0.38 million shares in March and April combined, in comparison to a total of 0.55 million shares sold in the past year and 1.06 million shares sold in the past two years.
We have written about our bullish outlook on AAPL several times before, and continue to be impressed by the company's ability to post strong revenue and earnings growth, and beat analyst expectations, even at these elevated market-cap levels. The stock, one of the strongest long-term performers in the market, is up a massive almost forty-fold in the past decade and currently trades near all-time highs. Barron's recently speculated that AAPL and Google Inc. (GOOG) could be added to the Dow to keep it relevant in the 21st century market (will it still be called the Dow Jones Industrial average, though?), a move that would add to the cadre of funds that would have to own AAPL and GOOG stock.
Surprisingly, this gem of a company can still be bought for 11 forward P/E compared with 9.6 average for its peers in the micro-computer group, while earnings are projected to increase at a compound 39.6% annualized rate from $27.68 in 2011 to $53.93 in 2013, compared with the average 5%-10% growth rates for many of its peers in the group. Furthermore, forward FY 2013 annual earnings estimates have gone up steadily from $38.98 at the end of 2011 to $53.93, as have broker upgrades and price targets that have kept pouring in since the blockbuster Q1 (December) and Q2 results. It appears that as large as these sales are, they may just be prudent profit-taking from senior executives diversifying out of AAPL as it continues its march upward to giddying heights.
Akamai Technologies Inc. (AKAM): Akamai is a global provider of services that help enterprises and e-businesses improve the delivery of their content and applications over the Internet. On Monday, Chief Scientist Thomson Leighton filed SEC Form 4 indicating that he purchased 100,000 shares for $3.3 million, ending with 3.6 million shares (in indirect holdings) after the purchase. In comparison, insiders purchased 150,000 shares in the past year.
The purchase is especially significant given that AKAM shares plunged late last week after it released its Q1 (March) quarter report last Wednesday, down over 15% at its lows yesterday from the levels it traded at prior to the report. While the company beat on both revenue and earnings for Q1, and also raised its revenue projections for Q2 ($322-330 million v/s $315 million), it projected soft earnings for Q2 (36c-38c v/s 39c), raising fears of heightened competition in the space that may lead to lower margins (and earnings) going forward.
In light of that, the purchase by Chief Scientist Leighton should give comfort to the bulls, and can be interpreted as a sign of confidence that the long-term trends that have propelled AKAM and its peers remain intact, and that it may be too early to conclude that competition will begin to hurt earnings. AKAM shares currently trade at 18-19 forward P/E and 2.7 P/B compared to averages of 34.3 and 3.3 for its peers in the Internet services group, while earnings are projected to rise at a 10.6% annual rate from $1.52 in 2011 to $1.86 in 2013.
On top of these, additional large insider sales on Monday in the healthcare and technology sectors included:
- An $8.7 million sale by seven insiders at Align Technology Inc. (ALGN), a medical device company that develops its proprietary Invisalign System for treating malocclusion or misalignment of the teeth; and
- A $5.7 million sale by CEO Benjamin Moreland at Crown Castle International Corp. (CCI), that operates wireless towers in the U.S., Australia and Puerto Rico for wireless service providers.
Furthermore, insiders also reported noteworthy buys on Monday in the healthcare and technology sectors in:
- Maxwell Technologies Inc. (MXWL), that is a leading developer and manufacturer of innovative, cost-effective storage and power delivery solutions, including the manufacture of high-voltage capacitors, ultra-capacitors and radiation-mitigated micro-electronics, in which two insiders purchased 25,000 shares for $0.24 million; and
- MusclePharm Corp. (OTC:MSLP), engaged in the development, manufacture, and marketing of nutritional supplements for athletes, in which two insiders purchased 1.17 million shares for $21,978.
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 Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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.