Are Insiders Foreseeing Bad Times Ahead For Palo Alto Networks Inc. (PANW) and Two Other Companies?

Slightly more than a decade ago, the U.S. Congress enacted the Sarbanes-Oxley Act of 2002 that mandated significant changes to reporting requirements. Following those changes, corporate insiders are required to report securities transactions with the SEC within two days following their trades, instead of 10 days stipulated under the old rules. This reporting requirement enables investors to use insider trading data in a more efficient manner, a piece of information that can help most types of investors throughout their stock selection and analysis process. Most insider trading experts say that insider buying serves as a very good signal to follow, but insider selling activity is much more complex. The increased usage of equity-based compensation has distorted the insider trading data and is it quite impossible to figure out the actual reasons behind each insider sale out there in the market. Even so, most insiders tend to operate as long term-oriented investors rather than traders by buying their company’s shares when they are undervalued and selling when they seem expensive (or approaching insiders’ estimates of “fair” valuation). Nonetheless, it would be advisable to interpret insider selling as a sign that companies approach their “fair” market value rather interpret that activity as a bearish signal. With that in mind, let’s discuss several noteworthy insider sales reported with the SEC on Friday.

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Palo Alto Networks Inc. (NYSE:PANW) has seen around seven corporate insiders unload shares in the past month or so, but some insider sales were either associated with freshly-exercised stock options or conducted under pre-arranged trading plans. Nonetheless, there were several noteworthy spur-of-the-moment insider sales that might be informative for the investment community. To start with, Director James J. Goetz discarded 23,643 shares on Wednesday at prices that ranged from $156.51 to $157.90 per share, trimming his ownership to 301,645 shares. Mr. Goetz also holds an indirect ownership stake of 14,614 shares, which is held by the Goetz Children’s Trust 4/24/1998. Carl M. Eschenbach, another member of the company’s Board of Directors, sold 1,780 shares on April 1 for $160.57 each, cutting his holding to 5,168 shares.

The cybersecurity company has seen its market capitalization decline by 16% since the beginning of 2016, so the recent insider selling does not necessarily serve as reason for optimism among investors. The shares of Palo Alto Networks have been weighted by the recently-held special Investor Track at the company’s Ignite 2016 cybersecurity conference in Las Vegas, during which attendees had the chance to receive up-to-date insights about the company’s market opportunity, business strategy, financials, among other things. Some analysts, including Andrew Nowinski of Piper Jaffray, believe that Palo Alto Networks Inc. (NYSE:PANW)’s guidance on operating margin slightly disappointed investors, while the costs associated with the construction of the company’s headquarters seem to be higher-than-expected. Even so, most financial hubs that cover the cybersecurity firm have issued ‘Buy’ ratings on the company. For instance, analysts at Nomura recently reiterated the ‘Buy’ rating on Palo Alto Networks, saying that they “continue to view Palo Alto Networks as one the best-positioned vendors in the overall IT Security market”. Nomura has a price target of $200 on the company, which yields an upside of 35%.

The hedge fund sentiment towards the cybersecurity firm increased mildly during the final quarter of 2015, as the number of funds with stakes in the company climbed to 50 from 47 quarter-on-quarter. Those 50 funds amassed nearly 8% of the company’s total number of outstanding shares on December 31. Jim Simons’ Renaissance Technologies reported ownership of 1.36 million shares in Palo Alto Networks Inc. (NYSE:PANW) through the round of 13Fs for the December quarter.

Let’s head to the next pages of this article, where we will discuss the insider selling registered at Heico Corp (NYSE:HEI) and Village Super Market Inc. (NASDAQ:VLGEA).

Heico Corp (NYSE:HEI) had one of its executives report the sale of some shares this past week. Thomas S. Irwin, Senior Executive Vice President, sold 15,000 units of common stock on Thursday at a price of $58.63 per unit, trimming his stake to 70,739 units. Mr. Irwin also owns 89,388 Class A shares of common stock, along with an additional 133,231 shares of common stock held in the Irwin Family Irrevocable Trust. Heico has two classes of common stock: Heico Class A common stock traded under the ticker “HEI.A” and Heico Common stock traded under the ticker “HEI”. The two classes of common stock are virtually the same, save for voting rights: Heico Class A common stock carries one-tenth of a vote per share and Heico common stock carries one vote per share.

Heico Corporation’s business operations involve designing, manufacturing and distributing certain niche aviation, defense, space, medical, telecommunications and electronics products. The company mainly operates through two main business segments: the flight support group (FSG) and the electronic technologies group (ETG). Heico’s consolidated net sales for the first quarter of fiscal 2016 that ended January 31 totaled $306.23 million, which increased from $268.19 million reported for the same quarter of the prior year. The 14% increase reflects a 12% rise in net sales within the FSG segment and a 17% increase within the ETG segment. To be more detailed, the increase in FSG net sales were mainly driven by the company’s acquisitions, as well as additional net sales from its specialty products and aftermarket replacement parts product lines. Meanwhile, ETG net sales were positively impacted by acquisitions and organic growth of roughly 4%, which was in turn driven by higher net sales from certain space and defense products. Net income for the first quarter grew to $31.27 million, or $0.46 per diluted share, from $27.64 million, or $0.41 per diluted share, reported a year ago.

The share price of Heico’s common stock has gained 9% since the beginning of 2016 and could keep rising higher should the company manage to successfully reach its fiscal 2016 top- and bottom-line guidance figures. The management anticipates fiscal 2016 net sales to grow in the range of 14%-to-16%, while net income is expected to reach a growth rate of 10%-to-13%. Even so, Heico’s common stock is currently trading at a fat forward P/E ratio of 23.7, which is significantly higher than the forward P/E multiple of 15.9 for the Aerospace and Defense industry. Ken Fisher’s Fisher Asset Management owned 1.02 million shares of common stock of Heico Corp (NYSE:HEI) at the end of December.

Village Super Market Inc. (NASDAQ:VLGEA) also witnessed some insider selling last week. Director David C. Judge unloaded 1,000 Class A shares on Wednesday at $24.15 apiece, trimming his stake to 7,700 shares. John P. Sumas, Executive Vice President, sold 4,000 Class A units of common stock on the same day for $24.15 each. Following the recent sale, Mr. Sumas currently holds an ownership stake of 355,195 shares.

Village Super Market operates a chain of 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. What’s more, the company represents the second-largest affiliate in the retailer-owned food cooperative and owner of the ShopRite name, called Wakefern Food Corporation. Village Super Market’s sales for the first half of fiscal 2016 that ended January 23 totaled $809.70 million, which increased 2.4% year-on-year. The company’s same-store sales increased 2.4% as a result of higher sales in the last week of the second quarter due to preparations for Winter Storm Jonas, as well as due to the closing of two competing stores and sustained sales growth in the certain stores. The increase was partly offset by the openings of six competitors’ stores and deflation in the meat, seafood and dairy departments. Meanwhile, net income for the first six months of fiscal 2016 totaled $10.71 million, which increased from $10.48 million reported for the same period of the previous year. However, adjusted net income decreased by 15% year-on-year due to lower gross profit margins and higher operating and administrative expenses.

The management of Village Super Market anticipates same-store sales to grow in the range of 0.5%-to-1.5% in fiscal 2016. Considering that the shares of the chain operator are down 27% in the past 12 months and down nearly 9% year-to-date, the recent insider selling at the company might serve as reason for concern within the investment community. A mere five hedge funds from our system had stakes in the company at the end of 2015, accumulating approximately 12% of its outstanding shares. Royce & Associates, founded by Chuck Royce, owns 1.26 million shares of Village Super Market Inc. (NASDAQ:VLGEA) as of December 31.

Disclosure: None