Analyzing Tuesday's Noteworthy Insider Trades

by: GuruFundPicks

We present here noteworthy insider trades from Tuesday's (March 27th, 2012) SEC Form 4 (insider trading) filings (ex-healthcare and technology sectors, that was covered in an earlier article) as part of our daily and weekly coverage of insider trades. These were selected by a review of over 265 separate SEC Form 4 transactions filed by insiders on Friday. 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):

Kopin Corp. (NASDAQ:KOPN): KOPN is a manufacturer of gallium arsenide transistor products and miniature flat panel displays used in thermal weapon sights, camcorders, digital cameras and MP3 devices. On Tuesday, CEO John Fan filed SEC Form 4 indicating that he purchased 52,800 shares for $0.18 million. This is the third purchase reported in the last week, during which two insiders, including Mr. Fan and Chief Technology Officer Hong Choi, reported purchasing a total of 131,800 shares for $0.56 million. These are the only insider purchases on record at least in the last two years. Also, during the last week, insiders have reported selling 59,000 shares, the only insider sales on record in the last two years.

In its latest Q4 reported at the beginning of March, KOPN missed analyst earnings estimates (1c v/s 3c) and beat revenues ($35 million v/s $33 million). Also, it lowered revenues for FY 2012 to $110-$120 million v/s two-analyst consensus estimates of $148 million, primarily on account of weakness in its military segment resulting from Department of Defense (DOD) budget cuts. Two brokers, Wunderlich and Needham, have since downgraded the stock to Hold from Buy, with Wunderlich lowering its price target from $5 to $3.50. The stock currently trades at a current 57.9 P/E and 1.6 P/B compared to averages of 14.1 and 1.5 for its peers in the miscellaneous electronics products group.

Camac Energy Inc. (CAK): CAK, formerly known as Pacific Asia Petroleum, that is an independent U.S. oil and gas exploration and production company. On Tuesday, two insiders filed SEC Forms 4 indicating that they purchased 85,100 shares for $73,340, with the large majority (80,000) of the shares purchased by Chairman and CEO Kase Lawal. This is in addition to the 12,000 shares purchased by SVP Nicolas Evanoff in the last week. These purchases in the last week are the only insider purchases at CAK in the last year. CAK shares currently trade at their lows, at 0.8 P/B and 3.4 PSR (price-to-sales ratio) compared to averages of 2.1 and 8.8 for its peers in the U.S. oil and gas exploration and production group.

Discover Financial Services (NYSE:DFS): DFS is a bank holding company and operator of the famous Discover Card with more than 50 million card-members and the Discover Network with millions of merchants and cash access locations. On Tuesday, three insiders (all EVPs and SVPs) filed SEC Forms 4 indicating that they sold 0.29 million shares for $9.5 million, with 0.20 million of the shares sold acquired by the exercise of options. In comparison, insiders sold 0.77 million shares in the past year.

DFS just last week released a great Q1 (February) report, beating analyst earnings estimates ($1.18 v/s 94c). The stock trades at 8-9 forward P/E and 2.0 P/B compared to averages of 8.7 and 1.5 for its peers in the consumer loans group. Analysts are bullish on the company, with a $37 mean price target on the stock, and of the 24 analysts that cover the company, 15 rate it buy/strong buy and the remaining nine rate it at hold. Also, last Friday Goldman added DFS to its Conviction Buy list with a lofty $39 price target on the stock.

Sandridge Energy Inc. (NYSE:SD): SD is an OK-based independent oil and natural gas company, with primary areas of focus being West Texas, the Cotton Valley Trend in East Texas and the Gulf Coast. On Tuesday, Director Daniel Jordan filed SEC Form 4 indicating that he purchased 50,000 shares for $0.39 million, ending with 1.57 million shares after the purchase. Insider buying is uncommon at SD, and in fact the last insider purchase was almost six months ago in September of last year, and overall insiders purchased 0.20 million shares in the past year. Besides the purchase, on Tuesday, EVP Todd Tipton filed SEC Form 4 indicating that he sold 25,675 shares.

SD in its most recent Q4 reported last month beat analyst revenue and earnings estimates. Its shares, however, trended lower after the report and currently trade at 19-20 forward P/E and 2.1 P/B compared to averages of 17.8 and 5.3 for its peers in the U.S. oil and gas exploration and production group.

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

  • A $9.3 million sale by three insiders at Petsmart Inc. (NASDAQ:PETM), an operator of a retail chain of stores selling products, services and solutions for pets;
  • A $3.6 million sale by three insiders at Raytheon Company (NYSE:RTN), a manufacturer of guidance systems and lasers, missile systems, integrated defense platforms, and command/ control systems;
  • A $1.4 million sale by CFO David Evans, pursuant to a 10b5-1 plan, at Scotts Miracle-gro Co. (NYSE:SMG), that manufactures lawn and garden products, including fertilizers and plant food; and
  • A $1.2 million sale by Vice-Chairman Dennis Highby, pursuant to a 10b5-1 plan, at Cabelas Inc. (NYSE:CAB) that operates 34 outdoor equipment stores in 23 states and Canada offering camping, fishing, and other products.

Furthermore, insiders also reported noteworthy buys on Tuesday in:

  • Bonanza Creek Energy Inc. (NYSE:BCEI), engaged in the acquisition, exploration and development of onshore oil and natural gas properties in the U.S., in which four insiders purchased 4,000 shares for $79,198, compared to 23,000 shares purchased by insiders in the past two years; and
  • BB&T Corp. (NYSE:BBT), that operates as a financial holding company for Branch Banking and Trust Company, which provides banking and trust services to individuals and businesses via over 1,700 offices in 12 states and Washington, D.C., in which Director David Boyer purchased 825 shares for $25,391, compared to 12,450 shares purchased 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. 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.

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.