In this article, we will examine two companies with recent large insider sales: Urban Outfitters, Inc. (NASDAQ:URBN) and Webster Financial Corporation (NYSE:WBS). Although we can only speculate as to the true motivation for the sales, investors can do more due diligence and determine whether there is a short sale opportunity, or just a large red flag to avoid a certain company’s stock.
Now, the conventional wisdom is that it is impossible to really determine the reason that insiders sell their stock in a company. The corporate insider could need to meet some unexpected obligations, such as taxes, and they also face a strong incentive to diversify their wealth away from a single equity investment. However, when multiple insiders are liquidating large amounts of their shares, retail investors should take note, for these very reasons here.
Urban Outfitters, Inc. (NASDAQ:URBN)
Urban Outfitters, Inc. (NASDAQ:URBN) is a retail clothing company that focuses on contemporary casual apparel for young men and young women. The Company operations various chains, including Urban Outfitters, Inc. (NASDAQ:URBN) and Anthropologie.
There have been some recent insider sales, with CEO Richard Hayne selling 1.508 Million shares in the Company according recent SEC Form 4 filings. Hayne still continues to hold over 19 millions shares. These sales come on the heels of Director Zausner Freeman’s move, in which he exercised some options while selling 100,000 shares. Absent any other information, these sales could be viewed as insiders merely diversifying their holdings. Still, there are some additional factors that may point to the Company potentially facing some headwinds in the near term future.
Urban Outfitters, Inc. (NASDAQ:URBN) did report positive revenue growth, with net Q4 sales increasing to $857 million, 17% more than the same quarter one year earlier. Net sales increased to $2.8 billion for the entire fiscal year, a boost of over 13% year-over-year. However, Urban Outfitters has a fairly high P/E ratio of 24.33. This is compared to a P/E ratio of 16.86 for competitor L Brands Inc (NYSE: LTD), and a P/E ratio of 11.11 for Express, Inc. (NYSE:EXPR). The smart money in general hasn’t exactly loved this space, as they’ve been dropping Express of late; see the details.
Further, it is unclear where sufficient future growth will come from…well, at least enough to justify the high-ish P/E ratio. Some hedge funds are betting on Urban Outfitters, as Steve Cohen and SAC Capital Advisors increased their position in the Company by 189% in Q4 of 2012; see the details of this fund here.
Urban Outfitters’ price action should also be analyzed. The retailer’s share price has traded in a wide range from $25.43 to $44.15 over the past 52 weeks, and although the price is up an impressive 35% in the past year, it appears to have stalled out more recently, up only 0.13% year-to-date. The price broke below its 50-day SMA in mid February, and is trading below the 9-day SMA as well. More importantly, the price is down approximately 6.45% since Urban Outfitters’ recent earnings announcement. Additionally, the price has bounced off the lower RSI level of 30 twice recently, indicating an oversold condition, with the general trend appearing to be downward.
When viewing the totality of the circumstances with the Company, there are some bearish indicators, combined with a large insider sale by the current CEO. Additionally, the stock has been volatile in the past year. Investors should continue to monitor future earnings surrounding Urban Outfitters, and watch for any indicators that may support bearish insider behavior.
Webster Financial Corporation (NYSE:WBS)
Webster Financial Corporation (NYSE:WBS), meanwhile, is another company with recent heavy insider sales. Webster Financial Corporation (NYSE:WBS) is a regional commercial bank providing banking, mortgage, financial planning, trust and investment services. Insiders have sold 8.129 million shares over the past three months, with insider buys of only 4,610 shares over the same time frame.
The Company reported recent earnings with net income of $47.9 million for Q4 of 2012, versus net income of $41.7 million for the same prior year quarter. Webster Financial Corporation (NYSE:WBS) currently has a modest dividend yield of 1.65%, but some hedgies were extraordinarily bullish, even in the face of insider selling.
Our records indicate that Citadel Investment Group—managed by billionaire Ken Griffin—increased its holdings of Webster Financial by 213% according to its most recent SEC 13F filing. The Company has a fairly high short interest of 2.5 million shares, representing a short float of 3.22%. The entire share float totals 84.17 million shares, such that the recent insider sales constitute 9.6% of the Company’s float.
Webster Financial’s share price has performed well, rising over 18% since the start of 2013, but since this is near multi-year highs, a possible pullback is at least in the realm of possibility. With insiders selling heavily, investors may want to temporarily avoid this stock. Webster Financial does not appear to be that strong of a short candidate at this time, but depending on how the additional insider shares impact the price on the market, it may be a prime candidate in the near term future. Investors may wish to examine First Niagara Financial Group Inc. (NASDAQ:FNFG), with a stronger dividend yield of 3.62%, as an alternative investment opportunity.
In conclusion, Urban Outfitters and Webster Financial provide examples of companies where heavy insider selling could be a signal of insiders’ decreased confidence in the future performance of their businesses. By performing significant due diligence, investors may be able to determine whether the insiders are merely diversifying their risk as an savvy investment move, or whether they believe future performance is in jeopardy.
Disclosure: none
