Does Insider Selling Metric Suggest ‘Danger Ahead’ For These Three Companies?

Corporate insiders can buy or sell their companies’ shares via two simple means. They can either buy or sell shares through open market transactions, or make trades through a 10b5-1 trading plan. The Insider Monkey team keeps an eye on the spontaneous insider trades only and avoids analyzing insider trades conducted under trading plans. The reason why we consider the trades conducted under trading plans uninformative is because they are structured well in advance of any specific trade and therefore do not reflect recent developments at the companies in question. The spur-of-the-moment insider sales on the other hand can provide more insight about different companies’ future prospects. With that in mind, let’s proceed with a discussion about the spontaneous insider sales registered at three U.S.-listed companies recently and see what insight they can provide.

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Prior to discussing the insider trading activity, let’s make you familiar with what Insider Monkey does besides providing high-quality articles. At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning 102% and beating the market by more than 53 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise (while avoiding their high fees at the same time) rather than large-cap stocks.

Electronic Arts Inc. (NASDAQ:EA) is one of the three companies that has registered high insider selling activity this week. The video game giant has seen three different insiders sell stock thus far this trading week, though two of them conducted their sales under trading plans. In the other case, Director Vivek Paul sold 25,000 shares on Monday at prices in the range of $71.89-to-$73.27, after exercising 11,872 non-qualified stock options on the same day. As a result, the net sale adds up to 13,128 shares. Meanwhile, the Director currently holds a stake of 1,615 shares. Just recently, Electronic Arts Inc. (NASDAQ:EA) posted better-than-expected results for its fiscal year 2016 second quarter, in addition to raising its full-year sales outlook for Star Wars Battlefront. At the same time, the shares of the video game publisher have advanced by 58% since the beginning of the year. However, they seem to be trading at a rich trailing P/E ratio of 25.10, which is greater than the median of 22.65 for the companies included in the S&P 500 index. Cliff Asness’ AQR Capital Management owned a 4.61 million-share stake in Electronic Arts Inc. (NASDAQ:EA) at the end of the June quarter.

The next page of the article discusses the insider selling activity at CoreSite Realty Corp and ENSCO PLC.