Insider Sales Case Study: It Is A Deceptive Indicator Of Insider Confidence In A Company

Includes: AMRN, CTSH
by: StockRiters

Insider transactions are good indicators of a company's health and prospects. Now, of course, insider transactions are mainly of two sorts - buy and sell. While buying strongly indicates the level of trust and confidence insiders have in their company, insider selling does not always point to the opposite direction. People can sell stocks for various reasons that have nothing to do with their confidence level in the stock. Even wealthy corporate insiders may need some quick cash, or have some other personal reason for selling a great stock.

So, while in general, insider sales shows that the top management is not confident about the future direction to be taken by the company, more research is necessary to confirm that. Like any other indicator, insider selling should not be used as the sole criterion for making your portfolio decision. It should be combined with other factors to determine its overall impact.

I have picked two stocks, Amarin Corporation (NASDAQ:AMRN) and Cognizant Technology (NASDAQ:CTSH), to illustrate how insider sales can be deceptive as an indicator. Both these stocks have witnessed major inside selling recently. However, upon combining this information with other factors, they tell different stories. While AMRN insider sales seems to be an indication of lack of confidence, CTSH does seem to be a good buy despite the insider sales.

Amarin Corporation PLC: Amarin saw its CEO Joseph S Zakrzewski offloading 150,000 shares on October 1, 2012. The shares were sold at an average price of $12.56 and the total transaction was worth $1.884 million. While a CEO selling company stock is a bad enough news, the impact becomes more pronounced when the stock price is also in a downward movement. Amarin Corporation stock is currently trading at $11.20 in the early trading, down 5.17 percent from its previous close of $11.81. The stock has been losing value from the last one month.

Another bearish indicator for the stock is that it is currently trading below its short term 20 days EMA and long term 50 days EMA price of $11.56 and $11.67 respectively. The company has seen some rumors about a potential takeover. The market also rated Amarin Corporation as a very attractive acquisition target. However, as time passes by and no acquisition deal seems to be fructifying, the stock begin to lose its steam.

The company received FDA approval for its Vascepa drug in July this year. It's on the strength of this drug that the company was considered to be an acquisition magnet. However, now it looks to me like Amarin Corporation is preparing to launch the drug on its own. Though the drug is likely to be successful, it would certainly be hurt by the fact that the company has yet to draw up a concrete distribution or marketing plan for the drug. Analyzing the impact on the company's bottom line would require another article and will need forecast about the potential revenue of the drug and the expenditure involved in setting up infrastructure from scratch. However, since the company has not even charted out any distribution or marketing plan, so at this point, it is difficult to quantify the impact on bottom line.

Amarin Corporation also suffers from nearly dry pipeline as it is not currently in the process of developing any other promising drug. So, unless there is an acquisition deal to be announced in the near future, the stock is likely to continue its downward spiral. The proverbial last straw is the latest rating downgrade by Wedbush from Outperform to Neutral. So, my verdict is to stay away from the stock until there is any positive news to boost the stock price up. This also tells me why the CEO is unloading the stock - he probably has as much confidence in the stock as Wedbush.

Cognizant Technology Solutions Corp. : The company Vice Chairman Narayanan Lakshmi sold 50,000 shares on October 2, 2012 at the average price of $71.06. The net consideration for the transaction stood at $3.553 million.

However, the stock has been following an upward trajectory from the last one month. Unlike Amarin, Cognizant Technology stock is trading well above its short term 20 days EMA of $68.62 and $65.99, showing bullish trends. The stock is currently at $71.33 level in the early trade. Cognizant Technology stock is trading at the Price Earnings ratio of 22.91, which is in line with the industry average. The company has market capitalization of $21.35 billion.

The stock has also received good ratings from analysts. Nomura issued its Buy rating for the stock and gave its price target at $75. Jefferies Group also has Buy rating for the stock and recently bumped the price target from $76 to $80.

This software services stock has a lot going for it. The company is gaining leadership position in the outsourcing segment. Cognizant Technology is also going aggressive in its marketing endeavors. The company spends about 22 percent of its revenue on its selling, general and administrative expenses. These expenses include marketing expenses for winning new contracts. In fact, the company is spending more than most of its competitors. These expenses may put a temporary strain on the company's bottom line, but its gains are likely to accrue in near future. With the positive recommendations, strong fundamentals and convincing technicals, the stock is a good buy despite recent insider selling transaction. This just goes to show that the insider sales probably had nothing to do with any loss of confidence, and also shows that you should never trust insider sales data alone in deciding to offload a stock you own.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.