Analyzing Monday's Noteworthy Insider Trades

by: GuruFundPicks

We present here three noteworthy insider buys and seven noteworthy insider sells from Monday's (April 23rd, 2012) over 125 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):

Intel Corp. (NASDAQ:INTC): INTC is one of the world's largest manufacturers of semiconductor chips, including microprocessors, chipsets, network processors, motherboards, non-volatile memory and storage. Its products are used in notebooks, netbooks, desktops, servers, workstations, storage products, embedded applications, communications products, consumer electronics devices, and handhelds. On Monday, CEO Paul Otellini filed SEC Form 4 indicating that he sold 1.92 million shares for $53.4 million, ending with 0.44 million shares in direct and another 0.48 million shares in indirect holdings after the sale. In comparison, insiders at Intel sold a total of 4.6 million shares in the past year.

INTC shares have traded generally range-bound for the last 10 years, between $15 and $30, and are currently approaching the top-end of that range, up about 12% YTD. The company released its Q1 last Tuesday in which it reported revenues in-line and beat analyst earnings estimates (56c v/s 53c), and guided Q2 revenues in-line. Compared to its peers in the semiconductor space, INTC is undervalued, trading at 10-11 forward P/E and 2.9 P/B compared to averages of 13.4 and 3.4 respectively, while earnings are projected to rise modestly from $2.53 in 2011 to $2.68 in 2013. Also, it has an attractive annual dividend yield of 3.0%.

Huntington Bancshares Inc. (NASDAQ:HBAN): HBAN operates as the holding company for the Huntington National Bank that provides commercial and consumer banking services via 611 offices in Ohio, Michigan, Pennsylvania, Indiana, West Virginia, Kentucky and Florida. On Monday, three insiders filed SEC Forms 4 indicating that they purchased 26,150 shares for $0.17 million. In comparison, insiders purchased less than 50,000 shares in the past six months, and 0.26 million shares in the past year. HBAN just released its Q1 last Wednesday, in which it beat analyst earnings estimates (17c v/s 14c). The company also revealed in its earnings conference call later that morning that it was seeking acquisitions in the $500 million to $2.5 billion range, and that it was evaluating dividend and stock buyback options. Its shares currently trade at a discount 9-10 forward P/E and 1.1 P/B compared with the averages of 13.5 and 0.8 for Midwestern banks, while earnings are projected to increase modestly from 60c in 2011 to 66c in 2013.

Rite Aid Corp. (NYSE:RAD): RAD operates approximately 4,700 retail drugstores in 31 states and the District of Columbia, with a strong presence on both the East and West coasts, offering prescription drugs, convenience products and cosmetics. On Monday, Jean Coutu Group, a Quebec-based Canadian drugstore chain with more than 360 franchised locations, and an insider by virtue of its 10% ownership in the company, filed SEC Form 4 indicating that it sold 44.8 million shares for $67.2 million, ending with 178.4 million shares after the sale. This is in addition to the sale of 11.2 million shares by Jean Coutu Group that we reported yesterday.

RAD shares have surged this year, up about 70% at its peak last month, on speculation that the company was finally close to turning the corner toward profitability, and also based on rumors that it might be an acquisition target of rival Walgreen Company (WAG). However, the recent sale of 56 million shares by a significant insider, Jean Coutu Group, as noted above, may cast a shadow on such speculation that a turn or an acquisition would happen in the near-term. In its most recent Q4 (ending February) reported nearly two weeks ago, the company missed analyst earnings estimates. However, analysts are optimistic that a turn is near, projecting that losses would drop from 43c in 2012 to 12c by 2014.

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

  • A $4.2 million sale by EVP Gregg Alton at Gilead Sciences Inc. (NASDAQ:GILD), that is a developer of therapeutics to treat viral, fungal, respiratory and cardiovascular diseases;
  • A $3.8 million sale by CEO Erik Olsson at RSC Holdings Inc. (NYSE:RRR-OLD), a provider or non-residential and industrial construction equipment rentals via over 450 stores in the U.S. and Canada;
  • A $2.1 million sale by Chairman and CEO Ralph Lauren at premium apparel, accessories, fragrances, and home furnishings provider Ralph Lauren Corp. (NYSE:RL);
  • A $1.1 million sale by EVP Stephen Braunscheidel at northeast regional bank M&T Bank Corp. (NYSE:MTB); and
  • A $1.0 million sale by CEO Debra Reed at Sempra Energy (NYSE:SRE), that is a holding company engaged in natural gas and electric utility services.

Furthermore, insiders also reported noteworthy buys on Monday 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 75,784 shares for $0.35 million, increasing his holdings to 2.82 million shares; and
  • Tumi Holdings Inc. (NYSE:TUMI), that designs, produces and markets travel products, business cards, and accessories, in which Director Joseph Gromek purchased 12,000 shares for $0.31 million.

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.

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