Insiders made noteworthy buys (see definition below) in four retail stocks this past week (May 21st to 25th, 2012), and sold four others. These were selected based on a review of over 1,600 separate SEC Form 4 (insider trading) filings last week, 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):
Best Buy Co. Inc. (NYSE:BBY): BBY is a retailer of consumer electronics, PC and other home office products, mobile phones, entertainment software, major appliances, and related services in the U.S., Canada, Europe and China. On Wednesday, Interim CEO George Mikan filed SEC Form 4 indicating that he purchased 100,000 shares for $1.8 million, ending with 106,000 shares after the purchase (not including derivative holdings). In comparison, insiders purchased only an additional under 11,000 shares in the past two years.
BBY reported its Q1 (April) on Tuesday, a stub two-month period as the company changes its FY end from February to January, beating analyst revenue and earnings estimates (72c v/s 59c), and reaffirming FY 2013 guidance. While part of the outperformance this quarter was due to a lower tax rate (30.6% v/s 34.6%), nevertheless, BBY bears may have a more difficult time proving their contention that BBY is the next Circuit City, and their death-by-Amazon (NASDAQ:AMZN) thesis.
It is fair to say that the company has formidable challenges ahead of it, but we have heard of the death of the big-box store for more than a decade now, And yes, some buyers do use the company's stores as a showroom, and take their purchases online, but that too has been happening for a while. Indeed, it is quite probable that the company's focus on shopper experience may be paying off, and there may always be a core (large) group of shoppers who may prefer the whole 'offline' shopping experience. Furthermore, a critical advantage that online stores have in terms of no sales tax in many states could disappear in this time of increasing strain on state and local budgets, which can greatly enhance the competitive advantage of brick-and-mortar stores.
BBY is also taking critical steps in terms of increasing their online focus, right-sizing their stores, and improving customer experience. It is still unclear how this battle between Amazon and the brick-and-mortar stores will end, but for the time being, it seems that the company is improving performance, and its shares can be purchased for a discounted 5 forward P/E and 1.7 P/B compared to averages of 9.2 and 1.1 for its peers in the consumer electronics retailers group, while earnings are projected to fall slightly from $3.91 in 2012 to $3.76 in 2014. BBY shares have typically traded even in the post-Amazon era in the 6-18 P/E range on a TTM (trailing-twelve-month) basis, and the current 4.8 P/E on a TTM basis is below the bottom-end of that range.
Besides BBY, insiders also made purchased in the following three retail stocks, the first two of which, like BBY above, also have share prices that have plunged recently:
- Abercrombie & Fitch Co. (NYSE:ANF), which operates a chain of specialty retail stores under the Abercrombie & Fitch, Hollister and Gilly Hicks brands, selling casual apparel for men, women and kids, in which Director Craig Stapleton purchased 10,000 shares for $0.35 million, in comparison to only an additional 7,398 shares purchased in the past two years;
- GameStop Corp. (NYSE:GME), which is a retailer of video game products and personal computer (PC) entertainment software, in which two insiders purchased 22,290 shares for $0.42 million, in comparison to only an additional 2,335 shares purchased by insiders in the past two years; and
- Home Depot Inc. (NYSE:HD), which operates as a home improvement retailer, selling a broad range of building materials, home improvement products, and lawn and garden products to do-it-yourself, do-it-for-me and professional customers in the U.S, Canada, Mexico, and China, in which Director Armando Codina purchased 20,650 shares for $1.0 million, the only insider purchase at HD at least in the past two years.
On top of these, insiders also reported noteworthy sales last week in the retail sector in:
- Dicks Sporting Goods (NYSE:DKS), a leading sporting goods retailer in the U.S., operating over 470 Dick's Sporting Goods stores and over 80 Golf Galaxy stores, in which Chairman & CEO Edward Stack filed SEC Form 4 indicating that he exercised options and sold the resulting 1.17 million shares for $54.9 million (pursuant to a MOU, under which his former spouse receives the economic benefit resulting from half of the after-tax proceeds), in comparison with 1.47 million shares sold by insiders in the past year;
- Kohl's Corp. (NYSE:KSS), which operates over 1,000 family-oriented, specialty department stores in the U.S., in which Chairman & CEO Kevin Mansell filed SEC Forms 4 indicating that he exercised options and sold the resulting 140,000 shares for $6.9 million, in comparison to 0.31 million shares sold by insiders in the past two years;
- Foot Locker Inc. (NYSE:FL), which operates a chain of athletic footwear and apparel stores in the North America, Europe, Asia and Australia, in which two insiders filed SEC Forms 4 indicating that they sold 63,522 shares (part of the shares resulting from the exercise of options) for $2.0 million, in comparison with 0.61 million shares sold by insiders in the past two years; and
- Dillard's Inc. (NYSE:DDS), a national home furnishings, cosmetics and fashion apparel retailer operating over 300 department stores, in which VP Paul Schroeder filed SEC Form 4 indicating that he exercised options and sold the resulting 25,000 shares for $1.8 million, in comparison to 0.19 million shares sold 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.
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 ten percent of 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 nonpublic 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 maybe 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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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