Don’t Copy the Insider Purchase at Guidewire

A filing with the SEC has disclosed that John Cavoores and his wife have jointly purchased 1,000 shares of Guidewire Software Inc (NYSE:GWRE) on January 9^th at an average price of $31.06 per share; Cavoores serves on the company’s Board of Directors and so this transaction had to be reported as an insider purchase. He now has voting power over a little more than 4,000 shares, about half of which are held jointly with his wife. Guidewire is a software and services company primarily selling to property and casualty insurance companies in the U.S., Canada, and Australia. It went public in January 2012 and is currently up 81% from its levels shortly after the IPO.

We track insider purchases because, logically, they should only take place when an insider is particularly confident in the company; the insider already has an economic connection to the company and the principles of diversification say that one should avoid being even further exposed to events which might affect that company. This is why stocks bought by insiders outperform the market under some conditions (read more about studies on insider trading). However, we’d be cautious in this particular case as there has been heavy insider selling at Guidewire Software Inc in the last month (research insider sales at Guidewire). Sales by insiders generally aren’t meaningful since diversification makes selling rational, but the volume of transactions in that direction are worth noting.

The first quarter of Guidewire’s fiscal year ended in October. The company reported a 40% increase in revenue, with the services segment being the largest contributor to growth. However, gross profits were up at a much lower rate and significant operating expenses resulted in negative operating income for the quarter. Non-operating factors did result in positive net income but overall the results were quite poor. This is particularly troubling as the stock is priced for high growth: the forward P/E, based on consensus earnings for the fiscal year ending in June 2014, is 78.

Read on to see how Guidewire compares to its peers: