Analyzing Tuesday's Noteworthy Insider Trades

by: GuruFundPicks

We present here two noteworthy buys and 14 noteworthy sells from Tuesday's (March 20th, 2012) SEC Form 4 (insider trading) filings, as part of our daily and weekly coverage of insider trades. These were selected by a review of over 305 separate SEC Form 4 transactions filed by insiders on Tuesday. 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 information on how to interpret insider trades, please refer to the end of this article):

TD Ameritrade Holding Corp. (NASDAQ:AMTD): AMTD is a provider of securities brokerage services and technology-based financial services to retail investors, traders and independent registered investment advisors in the U.S. On Tuesday, Director Joseph Moglia filed SEC Form 4 indicating that he exercised options and sold the resulting 0.58 million shares for $11.7 million, pursuant to a 10b5-1 plan, ending with 0.62 million shares after the sale (not including derivative securities). In comparison, insiders at AMTD sold 2.0 million shares in the past year. AMTD shares are up a strong 30% YTD, and they trade at 15-16 forward P/E and 2.7 P/B compared to averages of 14.5 and 1.6 for its peers in the investment bankers/brokers group, while earnings are projected to ratchet up from $1.12 in 2011 to $1.32 in 2013. Its chief rival E*Trade Financial Corp. (NASDAQ:ETFC) trades at 15-16 forward P/E and 0.7 P/B.

Fusion-IO Inc. (NYSE:FIO): FIO is engaged in the development, marketing and sale of storage memory platforms for data centralization in the U.S. Its platforms enhance the processing capabilities within a datacenter by relocating process-critical or active data from centralized storage to the server where it is being processed. On Tuesday, two insiders filed SEC Forms 4 indicating that they sold 259,000 shares for $8.1 million, pursuant to 10b5-1 plans. Of these, COO Lance Smith sold 250,000 shares for $7.8 million that he acquired by exercising options, ending with no holdings (not including derivative securities). Insider selling has been particularly intense at FIO recently, with insiders reporting this month alone of having sold 0.86 million shares.

FIO shares trade at a very premium current 76 P/E, on a TTM basis, compared to the 17.3 average for its peers in the computer storage devices group. However, the Street is extremely bullish on the company, including recent positive statements from Morgan Stanley and CSFB earlier this month, both reiterating their overweight/outperform rating on the stock. While current fundamentals do not support the high valuation, the bullishness is based on the excellent long-term prospects for the firm's technology in helping enterprises manage the ever increasing huge amounts of data that are being constantly generated and that need to be processed to help them monetize their business models. The company counts Apple Inc. (NASDAQ:AAPL) and Facebook among its largest customers. Furthermore, shares have also been buoyed by rumors that the company could be acquired by Intel Corp. (NASDAQ:INTC) at valuations of well over $40, significantly above current prices in the $30 range.

Kimco Realty Corp. (NYSE:KIM): KIM is a REIT that owns, manages and acquires neighborhood and community shopping centers in the U.S., Canada, Mexico and Puerto Rico. On Tuesday, three insiders filed SEC Forms 4 indicating that they sold 39,432 shares for $0.8 million, with some of the shares acquired by the exercise of certain derivative securities, and some of those sales made pursuant to 10b5-1 plans. The sellers included CFO Glenn Cohen (12,632 shares), Director Joe Grills (22,500 shares) and VP Paul Westbrook (4,300 shares). In comparison, insiders sold just under 80,000 shares in the past year. KIM beat FFO estimates in its latest Q4 reported last month (33c v/s 30c), and it trades at forward price to funds from operations (P/FFO) ratio of 14.7 at par with the average of 14.7 for its peers in the REIT Equity Trust group. Also, it has a dividend yield of 3.8% compared to the 4.8% average for the group.

P/FFO is a more appropriate measure of value, commonly used in the REIT group, as it adds back in depreciation expenses that are typically taken out in calculating net income and earnings. This is because real estate, unlike fixed PP&E costs in the case of other groups, rarely loses value over the long-term, and in fact, most often appreciates over the long-term. So, in this case spreading out the investment cost in PP&E (in this case, mostly real estate) charges over the long-term makes little sense as is done in calculating net income; hence, depreciation is added back in and the resulting FFO is a more appropriate measure of the cash flows than is earnings.

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

  • A $9.5 million sale by four insiders at Weight Watchers International Inc. (NYSE:WTW), aprovider of weight control programs, serving primarily North America, the U.K., Continental Europe, Australia and New Zealand;
  • A $4.1 million sale by three insiders at Pioneer Natural Resources (NYSE:PXD), engaged in the exploration and production oil and gas in the U.S. and South Africa;
  • A $4.1 million sale by two insiders, pursuant to 10b5-1 plans, at Gap Inc. (NYSE:GPS), the operator 3,246 Gap, Old Navy and Banana Republic apparel stores worldwide;
  • A $3.5 million sale by three insiders at major discount chain retail store operator Target Corp. (NYSE:TGT);
  • A $3.3 million sale by Vice Chairman Roger Markfield, pursuant to a 10b5-1 plan, at American Eagle Outfitters (NYSE:AEO), an apparel and accessories retailer that operates over a thousand American Eagle Outfitters, Aerie standalone, and 77Kids stores in the U.S. and Canada;
  • A $3.0 million sale by Chairman and CEO Robert Niblock at Lowe's Companies Inc. (NYSE:LOW), a home improvement retailer operating 1,749 stores in the U.S., Canada and Mexico;
  • A $2.5 million sale by Executive Officer Anthony McWorter at Torchmark Corp. (NYSE:TMK), a provider of individual life and supplemental health insurance, including juvenile and senior life coverage;
  • A $1.8 million sale by EVP Robert Salmon at Netapp Inc. (NASDAQ:NTAP), a manufacturer of integrated network storage and data management hardware for corporations and government agencies;
  • A $1.2 million sale by Albert Friedberg, head of Toronto-based hedge fund company Friedberg Mercantile Group, and an insider by virtue of being a 10% owner, at Paramount Gold and Silver (NYSEMKT:PZG), a Canadian company engaged in the exploration and development of gold, silver and precious metals properties in Mexico and Nevada;
  • A $1.1 million sale by SVP Kevin Robert at offshore contract drilling services company Ensco Plc (NYSE:ESV); and
  • A $1.1 million sale by two insiders at Limelight Networks Inc. (NASDAQ:LLNW), a provider of content delivery network services for television, music, movie, software and social media industries worldwide.

Furthermore, insiders also reported noteworthy buys on Tuesday in:

  • RAIT Financial Trust (NYSE:RAS), a self-managed and self-advised REIT that invests in, manages and services real estate related assets with a focus on commercial real estate, in which Richard Mashaal of hedge fund Rima Senvest Management, an insider by virtue of being a 10% owner, purchased 100,356 shares for $0.53 million;
  • Sterling Construction Co. (NASDAQ:STRL), a heavy civil construction company, engaged in the building, reconstruction, and repair of transportation and water infrastructure, in which EVP and CFO Elizabeth Brumley purchased 5,300 shares for $49,841.

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% 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 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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.