Does Insider Selling Suggest Grim Tidings For These Companies?

The recent market volatility has divided market participants into two main camps. On the one hand, some might think that there are bountiful attractive buying opportunities in a seemingly oversold market. On the other hand, there are those who look at the fact that the U.S equities markets have incurred losses in four of the past five trading days since the Federal Reserve’s decision on interest rates as suggesting that there is more trouble ahead. The Dow Jones Industrial Average index has dropped by slightly more than 11% from its record high registered on May 19, 2015. Does this drop denote trouble for the global economy and a potential disruption in the strengthening U.S economy? Only time will tell, but some corporate insiders have started offloading their holdings, which could point to turbulent times at their companies in the upcoming months and years. Nevertheless, one should not perceive insider selling activity as an automatic bearish sign, as this activity might be not related to a company’s prospects on all occasions. In the following article we will discuss the recent insider selling activity (and the potential reasons behind it) at these three companies: Best Buy Co Inc (NYSE:BBY), Las Vegas Sands Corp. (NYSE:LVS), and Digimarc Corp (NASDAQ:DMRC).

Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned 118% over the ensuing 36 months, outperforming the S&P 500 Index by over 60 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.

Going back to the potential soon-to-be “underperformers”, Best Buy Co Inc (NYSE:BBY) had two different insiders sell stock recently. Keith J. Nelsen, who has been acting as General Counsel and Secretary of Best Buy since 2011, reported selling 34,632 shares on Monday at a price of $37.99 per share, reducing his stake to 33,162 shares. However, it is worth mentioning that 14,975 options held by the executive vested recently, 528 of which were automatically withheld to satisfy tax withholding obligations. Similarly, Chief Merchandising Officer Rajendra M. Mohan unloaded 40,000 shares at a weighted average price of $38.52 last week and currently owns 104,959 shares. As in the case of the previous executive, 30,000 options owned by the CMO vested prior to proceeding with the aforementioned sale. Some market participants ignored the broader market pullback and started driving up the price of the retailer’s shares after the company posted its second quarter financial results in late August. The stock has gained nearly 26% over the past one-month period, so these insiders might be cashing out on concerns over volatile stock performance in the months ahead. Cliff Asness’ AQR Capital Management is the largest equity holder of Best Buy Co Inc (NYSE:BBY) among the hedge funds tracked by Insider Monkey, with 7.01 million shares.

Let’s not move on to Las Vegas Sands Corp. (NYSE:LVS), which has seen its stock drop by over 28% since the beginning of the year. Director Michael A. Leven reported selling 21,000 shares through multiple transactions at prices ranging from $45.12 to $46.62 per share, all of which were held by the Michael and Andrea Leven Revocable Trust. After the recent transactions, the Director owns 473,529 shares indirectly through this family trust. At the same time, Michael Leven owns an additional 5,315 shares directly, along with another 59,627 shares owned indirectly. Casino gaming stocks have suffered significantly over the last year or so, as gaming revenue in Macau has dropped for fifteen straight months. Las Vegas Sands, which operates several integrated resorts in Macau, is no exception. Reportedly, the Chinese government intends to implement more stimulus measures in Macau, after special administrative region’s government started pursing austerity measures to tackle the falling gaming revenue. Mario Gabelli’s GAMCO Investors reported an ownership stake of 699,519 shares of Las Vegas Sands Corp. (NYSE:LVS) through its latest 13F with the SEC.

Lastly, we will examine the insider selling activity at Digimarc Corp (NASDAQ:DMRC), a provider of media identification and management solutions. Bruce L. Davis, CEO and chairman of Digimarc, offloaded 4,485 shares at prices ranging from $37.08-to-$37.75 per share, trimming his stake of common stock to 101,481 shares. The CEO also owns 5,000 series A redeemable non-voting preferred shares, and a sizable amount of non-qualified stock options. Apparently, Digimarc’s stock performance has not been impacted by the recent broader market slump, with its shares gaining 33% since the beginning of the year. The company delivered a strong second quarter financial performance as its digital watermark technology continues to gain recognition. The Digimarc Barcode is an invisible watermark technology that makes it very easy and efficient to scan traditional barcoded items. Having said that, it is hard to stipulate the reasoning behind the CEO’s recent sale, which might be somewhat unrelated to the company’s prospects. Richard Mashaal’s RIMA Senvest Management represents the largest shareholder of Digimarc Corp (NASDAQ:DMRC) within our database, owning 625,000 shares.

Disclosure: None