Do Insiders Fear Trouble Ahead For These Companies?

Most shareholders of a company would be troubled by heavy insider selling, worrying that there is imminent trouble in the forthcoming future. However, investors should accurately interpret insider sales prior to cashing out their holdings or entering into short positions, as stock option compensations have significantly distorted the reality behind insider selling activity. Managers and employees of most companies are progressively offered stock options as part of their compensations, while the sales based on exercising of options are always reported with the SEC. Therefore, the fact that an insider sells freshly-exercised stock options does not necessarily represent a bad sign. Although insiders do not always rely on their perceptions of a company’s future prospects and profitability when selling shares, examining insider selling activity should still represent an important aspect of one’s stock analysis process. This article will reveal the insider sales registered at several 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 besides providing high-quality articles. We also track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10.0 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. the S&P 500’s 48.7% gain) over the last 38 months (see the details here).

Let’s kick off our discussion by closely investigating the insider selling activity observed at Chubb Corp (NYSE:CB). Executive Vice President and Chief Financial Officer Richard G. Spiro discarded 15,000 shares on Tuesday at a weighted average price of $131.14, cutting his overall stake to 94,817 shares. On June 30, Chubb and ACE Limited sealed a merger agreement, under which ACE’s subsidiary William Investment Holdings Corporation is set to merge with Chubb while the new Chubb will act as a wholly-owned indirect subsidiary of ACE. Under the terms of the deal, each share of Chubb will be converted into the right to receive 0.6019 shares of ACE common stock and $62.93 in cash. Shares of Chubb Corp (NYSE:CB) are up 26% for the year, thanks to the aforementioned deal that is anticipated to close during the first quarter of 2016. Even so, the stock appears to be relatively cheap at the moment if solely looking at Chubb’s trailing price-to-earnings ratio of 15.07, which is significantly below the ratio of 23.18 for the S&P 500 companies. Going back to the deal between the two companies, this merger will create an international insurer behemoth with annual revenues of over $31 billion. Clint Carlson’s Carlson Capital acquired a 1.69 million-share stake in Chubb Corp (NYSE:CB) during the third quarter.

The next page of this daily insider trading article will reveal the insider sales reported by several corporate insiders at RSP Permian Inc. (NYSE:RSPP) and Rofin-Sinar Technologies (NASDAQ:RSTI).

RSP Permian Inc. (NYSE:RSPP) had one of its top executives cash out a significant block of shares this week. Chief Financial Officer Scott McNeill unloaded 40,000 shares on Monday at prices between $28.27 and $28.92. Following the recent sizable sell-off, the CFO currently holds 744,052 shares. The independent oil and natural gas company, which completed its IPO back in January 2014, has seen its shares advance by more than 7% since the start of the year. The company mainly engages in the exploration and production of unconventional oil and liquids-rich natural gas reserves in the Permian Basin of West Texas. Of course, the high volatility in commodity prices has affected RSP Permian’s business, but the company has been hedging the price risk associated with a major portion of its anticipated production through collars, swaps and puts. Even so, the company is still subject to significant risks associated with commodity prices, as its revolving credit facility hinders RSP Permian from hedging more than 85% of its anticipated projection production. 20 hedge fund investors monitored by Insider money with positions in the company accumulated 11.20% of its outstanding common stock at the end of the third quarter. John Labanowski’s Brenham Capital Management upped its stake in RSP Permian Inc. (NYSE:RSPP) by 77% during the June-to-September quarter, ending the quarter with exactly 3 million shares.

Rofin-Sinar Technologies (NASDAQ:RSTI) has registered a high volume of insider selling activity this week, but most of the sales were based on exercising of options. Thus, let’s proceed with the discussion of the spur-of-the-moment insider sales that were not related to freshly-exercised stock options. Director Carl F. Baasel sold 15,000 shares on Monday and 25,000 shares on Tuesday at prices in the range of $28.00-to-$29.08 per share. Following these sales, the Director holds a stake of 117,000 shares. The maker of laser sources and laser-based system solutions derives roughly 70% of its laser sales from the machine tool, automotive, semiconductor, electronics and photovoltaic industries. However, these industries are quite cyclical and may be faced with oversupply on some occasions, which could eventually result in sluggish demand for capital equipment, including the products manufactured by Rofin-Sinar. The shares of the company are trading at relatively the same level they were trading at the beginning of the year despite suffering two major pullbacks this year. At the same time, the stock has embarked on a steady uptrend since late-August and is still trading at an attractive trailing P/E ratio of 19.63. A number of 16 smart money investors tracked by our team were invested in the company at the end of the September quarter, stockpiling 12.40% of its outstanding shares. Royce & Associates, founded by Chuck Royce, cut its stake in Rofin-Sinar Technologies (NASDAQ:RSTI) by 12% during the latest quarter to 2.36 million shares.

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