Analyzing Thursday's Noteworthy Insider Buys And Sells

by: GuruFundPicks

We present here one noteworthy buy and six noteworthy sells from Thursday's SEC Form 4 (insider trading) filings (ex- the basic materials and energy sectors that was analyzed in a separate article that is hyperlinked to above) as part of our daily and weekly coverage of insider trades. These were selected by a review of over 475 separate transactions in over 265 different companies filed by insiders on Thursday. 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):

Seagate Technology (NASDAQ:STX): Seagate manufactures hard disk drives for the enterprise, desktop, mobile computing and consumer electronics markets. On Thursday, two insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 82,469 shares for $2.2 million, with the large majority (75,000 shares) sold by CFO Patrick O'Malley. While insider selling is not uncommon at STX, it has picked up recently as we reported earlier, with insiders reporting selling 1.26 million shares in February, and an additional 0.74 million shares in the last week of January. In comparison, insiders reported selling a total of 5.16 million shares in the past year.

The acceleration in insider sale activity comes at a time when STX shares are in a strong rally mode, up about 60% YTD and approaching multi-year highs. The rally comes after the company reported a stellar Q4 at the end of January, arguably among the best reports among large-caps so far for Q4, in which it obliterated analyst earnings estimates ($1.32 v/s $1.08) and gave strong guidance on revenue and gross margin for the next quarter and full year. The stock currently trades at a very cheap 3-4 forward P/E, while earnings are projected to rocket up at an 161.7% annual rate from $1.24 in 2011 to $6.17 in 2012 and $8.49 in 2013. Its closest peer Western Digital Corp. (NYSE:WDC), another hard disk drive manufacturer, trades at 6-7 forward P/E, while its earnings are projected to rise at a more modest 35.8% annual rate from $3.28 in 2011 to $6.05 in 2013.

Cablevision Systems (NYSE:CVC): CVC is a leading telecom, media and entertainment company. Its cable operations serve 3.1 million subscribers in the NY city area. On Thursday, Director Rand Araskog filed SEC Form 4 indicating that he purchased 25,000 shares for $0.36 million, the first insider purchase in almost three years, ending with 132,565 shares after the purchase.

The purchase occurs at a time when the market is clearly valuing the company at a discount compared to its peers, and the company has also been talked about recently as a potential takeover target. Its shares currently trade at a discount 11 forward P/E compared to the 15.5 average for the group, and also compared to the 13-14 forward P/E for its closest peer Comcast Corp. (NASDAQ:CMCSA), a provider of cable services and content to 22.8 million subscribers in 39 states, as well as Internet and phone services. Generally, however, we are not excited about the discount and would steer clear of CVC as the company faces significant competitive challenges from AT&T (NYSE:T) and Verizon's (NYSE:VZ) fiber optic-based services. It has been losing video subscribers and missing analyst earnings estimates recently, while the gain in its broadband subscribers is falling short of making up for the loss of video subscribers.

SunTrust Banks Inc. (NYSE:STI): STI is a holding company for SunTrust Bank, which provides traditional deposit and credit services, as well as trust and investment services via 1,668 offices in Alabama, Arkansas, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, West Virginia and Washington, D.C. On Thursday, Corp. EVP Mark Chancy filed SEC Form 4 indicating that he sold 27,500 shares for $0.63 million, ending with 45,506 shares in direct and another 1,259 shares in indirect holdings after the sale (not including derivative holdings). In comparison, insiders sold 47,143 shares in the past year. STI trades at 8-9 forward P/E and 0.6 P/B compared to averages of 9.2 and 0.9 for its peers in the major regional banks group.

On top of these, some additional large insider sales reported on Thursday included:

  • A $12.4 million sale by four insiders, pursuant to 10b5-1 plans, at Tempur Pedic International (NYSE:TPX), a manufacturer of temperature sensitive visco-elastic pressure foam mattresses, pillows and comfort/lumbar cushions;
  • A $3.6 million sale by COO Scott Stephenson, pursuant to a 10b5-1 plan, at leading provider of risk assessment solutions Verisk Analytics (NASDAQ:VRSK);
  • A $3.1 million sale by Founder and Chairman Emeritus Ralph Roberts at cable services provider, Comcast Corp.; and
  • A $2.0 million sale by two insiders at Torchmark Corp. (NYSE:TMK), a provider of individual life and supplemental health insurance, including juvenile and senior life coverage.

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 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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here