Analyzing Tuesday's Noteworthy Insider Trades

by: GuruFundPicks

We present here three noteworthy insider buys and four noteworthy insider sells from Tuesday's (April 10th, 2012) over 130 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):

GTx Inc. (GTXI): GTXI is a clinical-stage biotech company engaged in the development of small molecule drugs that selectively target hormone pathways to prevent and treat cancer, fractures and bone loss, muscle loss and other serious medical conditions. On Tuesday, CEO Mitchell Steiner filed SEC Form 4 indicating that he sold 43,423 shares for $0.16 million, ending with 4.8 million shares in direct and indirect holdings after the sale. Insider selling is uncommon at GTXI, and in fact, the last time insiders reported selling shares was over a year ago, in November of 2010.

GTXI shares have been extremely volatile this year, first up strongly over 60% in late January after Citigroup raised the price target from $8 to $19 on takeover potential, and then shares came crashing down in mid-February on an announcement that the FDA had placed a clinical hold on the company's studies of its Capesaris prostate cancer treatment. Last Wednesday, the company submitted to the FDA a complete response letter regarding the clinical hold, and it is expected that the FDA will respond within 30 days on whether it will lift the clinical hold.

Smucker JM Co. (SJM): SJM is engaged in the manufacturing and marketing of branded food products in the U.S., Canada and internationally, including coffee, peanut butter, shortening and oils, fruit spreads, baking mixes and other food products. On Tuesday, three insiders filed SEC Forms 4 indicating that they sold 21,150 shares for $1.7 million, pursuant to 10b5-1 plans, with 20,000 of those shares sold by President Mark Smucker.

SJM shares have staged a sharp rally after gapping down earlier this year on disappointing Q4 results, in which they missed analyst revenue ($1.47 billion v/s $1.54 billion) and earnings estimates ($1.22 v/s $1.41). The rally has been based on expectations of a reduced commodity cost inflation and a margin rebound in 2013. Its shares currently trade at 15-16 forward P/E and 1.7 P/B compared to averages of 43.4 and 3.3 for its peers in the diversified food group.

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

  • A $6.5 million sale by two insiders at Chipotle Mexican Grill (CMG), an operator of casual Mexican food restaurants in the U.S., Canada and U.K.; and
  • A $2.5 million sale by Chairman and CEO Michael Mussallem at cardiovascular medical products company Edwards Lifesciences Corp. (EW).

Furthermore, insiders also reported noteworthy buys on Tuesday in:

  • Keryx Biopharmaceuticals (KERX), a developer of novel pharmaceutical products to treat cancer, renal disease and other life-threatening diseases, in which Director Joseph Feczko purchased 20,000 shares for $32,400, on top of the purchase of 17,500 shares by Director Michael Tarnok that we reported just yesterday, and in comparison to 75,000 shares purchased by insiders in the past year;
  • Caterpillar Inc. (CAT), the world's largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines, in which Group President Richard Lavin purchased 405 shares for $25,556, in comparison to 2,455 shares purchased by insiders in the past year; and
  • Terex Corp. (TEX), a global manufacturer of a broad range of construction and mining related capital equipment, in which nine insiders purchased 851 shares for $18,644, in comparison to 4,520 shares purchased by insiders in the past six months.

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.