Insiders buy and sell their company stock for a variety of reasons. In this article, we review five transactions by insiders in stocks of companies that have recently sold off, mostly on negative quarterly reports. Insider buys, especially unusually large ones, in such stocks that have plunged recently, may give bulls comfort that the long-term fundamentals may be intact and that a turn may be under-way in the next couple of quarters. Sells, on the other hand, at depressed prices after the plunge may lend even further credence to the bear thesis.
These transactions were selected based on a review of over 850 separate SEC Form 4 (insider trading) filings this week from Monday through Wednesday's (May 7th, 8th, and 9th, 2012), 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):
Merge Healthcare Inc. (MRGE): MRGE develops medical imaging, clinical workflow process and patient information management software applications. The medical imaging software solutions support end-to-end business and clinical workflow for radiology department and specialty practices, imaging centers and hospitals. The patient information management software applications improve their customers' productivity and enhance the quality of the patient experience. On Wednesday, three insiders filed SEC Forms 4 indicating that they purchased 69,500 shares for $184,535. The largest purchase of 50,000 shares was by the CEO of its Merge Healthcare group, Jeff Surges, a new position for him in his portfolio. In comparison, insiders purchased a total of 0.33 million shares in the past year.
MRGE shares plunged on Tuesday after the company released its Q1 (March) the prior evening, in which it missed on both analyst revenues and earnings estimates (3c v/s 3c). Perhaps even more damagingly, the company also announced that it was withdrawing its financing its FY 2012 financial guidance, on account of the difficultly in predicting the short-term impact of the shift to a subscription pricing model. MRGE shares are down by about 35% since the report, and they currently trade at 7-8 forward P/E and 2.5 P/B compared to averages of 36.9 and 6.5 for its peers in the medical information systems group.
Green Mountain Coffee Roasters Inc. (GMCR): GMCR operates in the specialty coffee industry in the U.S. and internationally. It distributes approximately 200 whole bean and ground coffee selections, cocoa, teas and coffees. It is probably most famous for its patented single-cup coffee and tea brewing systems for offices and homes sold under the Keurig brand name.
On Tuesday, two insiders filed SEC Forms 4 indicating that they sold 5.55 million shares for $137.2 million, with footnotes to both filings indicating that the sales were done by a financial institution pursuant to a margin call. The larger of the two sales of 5.0 million shares was by GMCR founder and Director Robert Stiller, ending with 8.39 million shares after the sale; and the remaining 0.55 million shares were sold by Director William Davis, ending with 0.36 million shares after the sale. In comparison, insiders sold 7.6 million shares in the past year. Both individuals have since been relieved of their former roles as the sales ran counter to the company's internal trading policies. Mr. Stiller no longer serves as chairman of the board, and Mr. Davis no longer serves as Lead Director of the Board.
GMCR shares plunged last week, on Thursday, after the company reported a poor Q2 (March) the prior evening, beating earnings estimates by a penny (64c v/s 63c), but missing huge on revenues ($885 million v/s $972 million), and guiding down all of Q3 and FY 2012 revenues and earnings. The company also reported lower-than-expected K-Cup pack demand that may have factored even more into the drop. A slew of brokers have subsequently downgraded this former high-flier that just last September at its all-time highs was up a meteoric more than 20-fold in under three years.
After the fall, the stock now trades at a more reasonable 8-9 forward P/E and 1.9 P/B compared to averages of 15.6 and 2.5 for its peers in the wholesale food items group, while earnings are still projected to rise strongly from the current $2.20 on a TTM (trailing-twelve-month) basis to $3.15 in FY 2013 (ending September), at annual growth rates still exceeding 25%.
On top of these, additional insider trades this week among companies dropping on negative news included:
- A $49.6 million sale by 10% owner Robert Stiller (also the founder and Director of Green Mountain Coffee, see above) at Krispy Kreme Doughnuts (KKD), that is a leading branded retailer and wholesaler of premium quality doughnuts. KKD shares have been reeling to the downside after it missed earnings estimates by a penny (6c v/s 7c) in its latest Q4 (January) reported in mid-March, and were hit even harder this week by the sale of 8.1 million shares by Mr. Stiller.
- A purchase of 10,000 shares for $0.50 million by Director August Busch at Emerson Electric Co. (EMR), that designs and supplies a broad range of electrical, electromechanical and electronic product and systems, and associated engineering services, for the industrial, commercial and consumer markets. EMR shares have been in a downtrend ever since it reported its Q2 (March) report at the beginning of the month, missing analyst revenue and earnings estimates (74c v/s 80c).
- A purchase of 26,000 shares for $0.14 million by two insiders at Genworth Financial Inc. (GNW), a leading U.S.-based international insurance company offering life and long-term care insurance, annuities, asset management services and mortgage insurance worldwide. GNW shares reported its Q1 (March) at the beginning of the month, in which it missed analyst revenue and earnings estimates (6c v/s 11c), and its shares have drifted lower since, currently within striking distance of multi-year lows.
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 and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, 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.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GMCR over the next 72 hours.