Are Insiders Selling These 3 High-Potential Stocks Too Early?

The fourth-quarter earnings season is underway and investors are hoping that stronger-than-expected corporate earnings might change the disappointing course of U.S equities thus far in 2016. According to FactSet, the fourth-quarter S&P 500 earnings are anticipated to decline by 5.3% year-over-year, so the benchmark is on track to post the third consecutive year-over-year decline in earnings. A stronger U.S dollar, sluggish Chinese growth and declining crude oil prices are the main factors that might weight on fourth-quarter corporate earnings. As the number of companies reporting earnings will be increasing in the upcoming days and weeks, one might anticipate decreasing insider trading activity. As a general rule, investors find insider buying more informative than insider selling, but the latter type of activity should not be overlooked by any means. If I were investing my hard-earned money into a company’s stock, I would definitely be troubled by heavy insider selling at that company. For that reason, this article will reveal several noteworthy insider sales reported at three companies, and will also discuss the recent performance of those companies.

Prior to discussing the insider trading activity, let’s make you familiar with what Insider Monkey does. At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period, hedge funds’ top small-cap stocks beat the S&P 500 index by double digits annually (read the details here).

Red Hat Inc. (NYSE:RHT) is among the companies that witnessed strong insider selling in the past several days. Director William S. Kaiser sold 18,972 shares on Friday at prices ranging from $80.00-to-$80.42 per share. After the recent sizable sale, the Director continues to hold an ownership stake of 129,879 shares. The provider of open source software solutions was among the best-performing software stocks in 2015, returning 19.77% for the year. Open source software represents an alternative to proprietary software, and Red Hat Inc. (NYSE:RHT) has become the face of this model of developing commercial software code. The company has grown at a high pace over the past several years, and so has its valuation. The stock trades at an extremely high forward price-to-earnings ratio of 36.03, compared to the average of 15.75 for the companies included in the S&P 500.

In mid-December, Red Hat released its financial results for the third-quarter of fiscal year 2016, which were greeted positively by investors. Red Hat reported total revenue of $523.6 million, up from $455.9 million reported for the same period of the prior fiscal year. The revenue growth potential of the company and its smart investments and acquisitions might justify Red Hat’s high valuation, so one should not necessarily run away from the stock simply because the company is experiencing intensifying insider selling activity. 41 hedge funds monitored by Insider Monkey had stakes in the company at the end of the third quarter. New York-based D.E. Shaw & Co. L.P., founded by David E. Shaw, trimmed its stake in Red Hat Inc. (NYSE:RHT) by 11% during the September quarter to approximately 983,000 shares.

Let’s head to the next pages of this daily insider trading article, which disclose the recent insider sales reported at Sinclair Broadcast Group Inc. (NASDAQ:SBGI) and Laboratory Corp. of America Holdings (NYSE:LH).