Analyzing Wednesday's Noteworthy Insider Buys And Sells

by: GuruFundPicks

Insiders reported that on Wednesday December 21st, they bought and sold stock in over 270 separate transactions in 163 different companies. These transactions have to be reported within two days of the trade, so the transactions occurred sometime earlier this week. We culled through these 270 or so insider buys and sells (based on SEC Forms 3, 4 and 5 filings), as part of our daily and weekly coverage of insider trades, and present here the most notable trades reported Wednesday (for a general discussion on how to interpret insider trades, please look at the end of this article):

MELA Sciences Inc. (MELA): MELA is a medical device company that is focused on the design and development of a non-invasive, point-of-care system to assist in the detection of early melanoma. Its lead product MelaFind is a hand-held imaging device that emits light of multiple wavelengths to capture images of suspicious pigmented skin lesions and extract data. Insiders currently hold 4.1 million or 18.6% of outstanding shares. On Wednesday, CEO Joseph Gulfo reported purchasing 21,458 shares, increasing his holdings in the company to 143,311 shares. And Director Robert Coradini reported purchasing 21,457 shares, a new position for him in the company. The last time insiders purchased shares in MELA was in November of 2010.

Delcath Systems Inc. (NASDAQ:DCTH): DCTH is a development stage company that operates as a specialty pharmaceutical and medical device company. It has developed the Delcath System to isolate the liver from the general circulatory system and to administer chemotherapy and other therapeutic agents directly to the liver. Insiders currently own 3.4 million or 8% of outstanding shares. On Wednesday, Director Robert Ladd sold 20,000 shares from Laddcap Value Partners LP, an entity that he has indirect control of, ending with 651,294 shares (and another 36,854 shares under his direct control). This is in addition to the 20,000 shares that he reported selling just earlier this week, and the 40,000 shares that he reported selling in the prior week. While the dollar amount of the sales is small given that DCTH trades at $2.42 at yesterday's close, the sales are notable only because insider selling is uncommon at DCTH, and in fact the last time insiders sold shares was in 2008.

Cubist Pharmaceuticals (CBST): CBST is a biopharmaceutical company that develops anti-infective products to treat conditions in the acute care environment. Insiders currently hold 0.6 million shares or 1.0% of outstanding shares. On Wednesday, CEO Michael Bonney exercised options and sold the resulting 150,000 shares for $5.8 million, pursuant to a 10b5-1 trading plan, and ended with 135,433 shares. Also, COO Robert Perez exercised options and sold the resulting 25,000 shares for $1.0 million, pursuant to a 10b5-1 trading plan, and ended with 24,893 shares. This is significant in that these are large sales, the shares sold represent a significant portion of their holdings in the company, and given that during the past year insiders sold only an additional 238,668 shares (buying 6,500 shares). For our opinion on CBST, please refer to our article last month on how CBST's over-the-top offer to acquire Adolor Corp. (ADLR) was likely to ignite the opioid space.

Adobe Systems Inc. (NASDAQ:ADBE): ADBE is a diversified software company operating worldwide, and it offers a line of creative, business, Web and mobile software and services that are used by creative professionals, knowledge workers, developers, marketers, enterprises and consumers. Insiders currently hold 2.5 million or 0.5% of outstanding shares. On Wednesday, SVP Karen Cottle reported exercising options and selling the resulting 22,687 shares for $0.6 million, ending with 73,447 shares. This is on top of the 5,999 shares that SVP David Wadhwani reported selling just at the end of last week. This is significant in that insider selling is uncommon at ADBE, and the last time insiders sold prior to these two sales was in August, and overall insiders sold a total of 235,417 shares during the past year (buying none). ADBE trades at 10-11 forward P/E and 2.5 P/B compared to the averages of 34.1 and 3.8 for its peers in the computer software group.

Xylem Inc. (NYSE:XYL): XYL provides water technology solutions, water and water treatment solutions, and industrial pump and related technologies. On Wednesday, SVP Michael Kuchenbrod exercised options and sold the resulting 21,731 shares for $0.5 million, ending with 17,204 shares (and another 14,391 shares in indirect holdings). XYL was launched just last month as a spinoff of the water-related businesses of ITT Corporation (NYSE:ITT), and has over $3.2 billion in revenue and 12,000 employees worldwide. It trades at a current 13.2 P/E on a TTM basis and 2.4 P/B, while earnings are projected to grow from $1.78 in 2010 to $1.92 in 2012. Analysts are generally very positive on the outlook for the company, with a mean target of $57, and of the 19 analysts that cover the company, 14 rate it at buy/strong buy, five at neutral, and none at underperform/sell.

Accenture Plc (NYSE:ACN): ACN provides management consulting and technology and outsourcing services to businesses and government agencies. Insiders currently own 11.1 million or 1.7% of outstanding shares. On Wednesday, three insiders reported selling a total of 47,250 shares for $2.6 million. This included Executive Chairman William Green exercising options to acquire 30,720 shares and selling those and an additional 9,280 shares, pursuant to a 10b5-1 trading plan; and COO Johan Deblaere selling 6,000 shares and Group Chief Executive of Financial Services Richard Lumb selling 1,250 shares, both pursuant to 10b5-1 plans. Overall, insiders sold a total of 530,397 shares in the past year. ACN trades at a current 14.7 P/E on a TTM basis compared to 15.6 for its peers in the consulting group.

Applied Materials (NASDAQ:AMAT): AMAT provides manufacturing equipment, services and software to the semiconductor, flat panel display, solar photovoltaic (PV) and related industries worldwide. Insiders currently hold 15.8 million or 1.2% of outstanding shares. On Wednesday, Group VP Charles Pappis reported that he sold 37,583 shares for $0.4 million. Just yesterday, we reported that Director Gerhard Parker sold 20,000 shares for $0.2 million. Overall, insiders sold only an additional 14,424 shares in the past three months. AMAT trades at 9 forward P/E compared to the 12.0 average for its peers in the semiconductor equipment group.

On top of these, some additional large trades included a $3.6 million sale by CEO Richard Gelford in IMAX Corp. (NYSE:IMAX), a manufacturer of projection and sound systems for theaters, museums, science centers and other entertainment sites; a $1.6 million sale by Director William Foley in Fidelity National Financial Inc. (NYSE:FNF), a provider of title insurance, escrow services and specialty insurance; a total $4.5 million sale by Vice Chairman Hilton Schlosberg and CEO Rodney Sacks in Hansen Natural Corp. (HANS), a provider of energy drinks, fruit juices, smoothies and natural sodas; and a $5 million sale by Executive Chairman Norman Johnson in filtration products manufacturer Clarcor Inc. (NYSE:CLC).

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 who have access to non-public information. Large shareholders are defined by the SEC for this purpose are those that having beneficial ownership of 10% 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 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 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 were based on SEC filings, I-Metrix by Edgar Online, Zacks Investment Research, Thomson Reuters and 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, and no plans to initiate any positions within the next 72 hours.