Analyzing Wednesday's Noteworthy Insider Trades

by: GuruFundPicks

We present here noteworthy insider trades from Wednesday's (March 28th, 2012) over 310 separate SEC Form 4 (insider trading) filings as part of our daily and weekly coverage of insider trades. 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):

Ariad Pharmaceuticals Inc. (ARIA): ARIA is engaged in the development of drugs that treat aggressive and advanced-stage cancer by regulating cell signaling with small molecules. It is also developing small-molecule drugs that block signal transduction pathways in cells responsible for osteoporosis and immune and inflammatory diseases. On Wednesday, five insiders filed SEC Forms 4 indicating that they exercised options to acquire 52,875 shares and sold those and an additional 18,000 shares for $1.2 million, pursuant to 10b5-1 plans. The large majority of the sales were by SVP Pierre Dodion (25,000 shares) and SVP Maria Cantor (24,000 shares). Insider selling has recently been very intense at ARIA, with 0.28 million shares reported sold just in the last six trading days. In comparison, insiders sold 0.49 million shares in the past year.

ARIA shares are trading near 11-year highs after being up approximately 100% from the lows in October of last year, bolstered by recent broker upgrades based on the potential of its ponatinib treatment and other drugs in its pipeline. The company recently received negative news last week on Tuesday that the Oncologic Drugs Advisory Committee voted against recommending Taltorvic (ridaforolimus) for the treatment of adult and pediatric patients with metastatic soft tissue sarcoma or bone sarcoma. However, its shares have continued higher despite that as the main driver continues to be the advancement of ponatinib that the company plans for a marketing approval submission in the U.S. and Europe for Q3 of 2012.

Accenture Plc (ACN): ACN provides management consulting and technology and outsourcing services to businesses and government agencies. On Wednesday, five insiders filed SEC Forms 4 indicating that they sold 186,293 shares for $12.2 million, with all but 14,293 of those shares being sold pursuant to 10b5-1 plans. The large majority of the shares sold (130,000) were by Executive Chairman William Green. ACN last Thursday reported a good Q4, beating analyst earnings estimates (97c v/s 86c) and revenues, and guiding revenues and earnings higher for FY 2012, painting a strong picture not just for ACN but for the entire outsourcing industry. Its shares traded up strongly prior to the report, and are almost flat since, trading at 15 forward P/E and 9.3 P/B compared to averages of 16.6 and 1.6 for its peers in the consulting group.

Western Refining Inc. (WNR): WNR refines and markets crude oil and refined products in West TX, AZ, NM, UT, CO and the mid-Atlantic region. On Wednesday, Chairman of the Board and 10% owner Paul Foster filed SEC Forms 4 indicating that he sold 200,000 shares in direct holdings and another 100,000 shares that he holds indirectly via Franklin Mountain Investments Ltd. Partnership, pursuant to a 10b5-1 trading plan, ending with 6.5 million shares in direct and another 17.8 million shares in indirect holdings in the company. In comparison, insiders sold 5 million shares in the past year. WNR shares trade at 7 forward P/E and 2.0 P/B compared to averages of 11.2 and 2.4 for its peers in the oil refining and marketing group.

Discovery Communications (DISCA): DISCA offers original and purchased programming to the media and entertainment industries in the U.S. and 180 other countries. On Wednesday, two insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 241,955 shares for $11.8 million, pursuant to 10b5-1 plans. In comparison, insiders sold 4.1 million shares in the past year. DISCA is undervalued, and at trades at a current 19.2 P/E and 2.9 P/B compared to averages of 13.8 and 1.6 for its peers in the radio and TV broadcasting group.

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

  • An $8.7 million sale by two insiders at Lululemon Athletica (LULU), an operator and franchiser of yoga inspired athletic apparel stores for women, men and female youth in North America and Australia;
  • A $6.7 million sale by two insiders at Lowe's Companies Inc. (LOW), a home improvement retailer operating 1,749 stores in the U.S., Canada and Mexico;
  • A $5.2 million sale by EVP Harit Talwar at Discover Financial Services (DFS), 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 top of the $9.5 million sale by insiders that we reported on yesterday;
  • A $5.2 million sale by two insiders at leading athletic footwear, apparel, and equipment provider Nike Inc. (NKE); and
  • A $1.1 million sale by Co-COO Steve Beeks at film and TV entertainment producers and distributor Lions Gate Entertainment (LGF).

Furthermore, insiders also reported noteworthy buys on Wednesday in:

  • Verenium Corp. (VRNM), engaged in the development of enzyme-based products for industrial processes, for use in markets including animal health and nutrition, grain processing, biofuels and other specialty industrial processes, in which Austin Marxe and David Greenhouse, insiders by virtue of being 10% owners of the company via their investment vehicle, the Special Situation Fund, purchased 0.39 million shares for $1.5 million; and
  • Surrey Bancorp (OTCPK:SRYB), a holding company for Surrey Bank and Trust that provides individual and corporate financial services primarily in NC, in which Chairman of the Board Hylton Wright purchased 4,168 shares for $39,075.

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.