Massive Cluster of Insider Selling at Lennox International Inc. (LII) and 2 Other Well-Known Companies

Most investors would agree that tracking insider trading activity should play an important role in one’s stock selection and analysis process. After all, executives and Board members have more in-depth knowledge and up-to-date information on how their companies are performing and how they are likely to perform in the future than anyone else. Of course, there is no corporate insider who can flawlessly tell how undervalued or overvalued his or her company’s shares are, but these highly-informed individuals do have a better understanding of where their companies are heading than any of us.

Stock prices change rapidly based on the environment in the equity markets, but the underlying value of a business doesn’t change that fast. And there is good reason to believe corporate insiders are very good at capitalizing on this discrepancy. It is also commonly known that insiders sell shares for numerous reasons, many of which have nothing to do with their companies’ future prospects or intrinsic value. However, insider sales may occasionally suggest that insiders do not expect any significant positive developments at their companies in the near future, so keep in mind the concept of opportunity cost when tracking insider selling. With this in mind, the following article will discuss the insider selling activity registered at three companies earlier this week.

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 imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).

Insider Selling Registered at U.S. Regional Railroad After Q2 Earnings Release

Kansas City Southern (NYSE:KSU) has witnessed two executives unload shares this week, so let’s have a look at the people behind the recent insider selling at the company. David L. Starling, who recently stepped down from his role as Chief Executive Officer at the railway company after nearly six years on the job, discarded 5,100 shares on Wednesday at prices ranging from $98.77 to $98.91 per share. Mr. Starling, who will serve as Senior Advisor to the CEO through the end of 2016, currently owns 121,572 shares. William J. Wochner, Chief Legal Officer and Senior Vice President, unloaded 26,521 shares on the same day at prices that fell between $98.03 and $98.90 per share, cutting his ownership to 21,121 shares.

The recent insider selling comes shortly after North America’s fourth-largest railroad based on revenue released better than expected earnings for the second quarter. Kansas City Southern (NYSE:KSU)’s revenue decreased by 3% year-over-year to $568.5 million, mainly due to a decrease in revenue per carload/unit as a result of the weakening of the Mexican peso against the greenback and lower fuel surcharges. The company reported net income of $120.1 million, or $1.11 per diluted share for the quarter, up from $111.8 million, or $1.01 per diluted share recorded a year earlier. The weakening of the Mexican peso against the U.S dollar and lower fuel prices led to lower operating expenses.

There were 34 hedge fund vehicles followed by Insider Monkey with equity investments in the railroad company at the end of March, which amassed nearly 10% of its outstanding shares. Kansas City Southern’s shares have gained an impressive 30% since the start of 2016. Ken Fisher’s Fisher Asset Management cut its stake in Kansas City Southern (NYSE:KSU) by 2% during the June quarter to 687,393 shares.

The second page of this article will discuss the fresh insider selling registered at two other companies.

Cluster of Insider Selling at Major HVAC Industry Player

Lennox International Inc. (NYSE:LII) registered a cluster of insider selling earlier this week, which involved four different insiders. One of these insiders conducted the sale under a pre-arranged trading plan, which we’ll by pass reporting on. Of the remaining three we’ll start with Roy A. Rumbough Jr., Chief Accounting Officer, Vice President and Controller, who sold 1,410 shares on Wednesday for $151.23 each after 198 stock appreciation rights were exercised on the same day. After the recent transactions, Mr. Rumbough owns 2,524 shares. David W. Moon, Executive Vice President, President and Chief Operating Officer of LII’s Worldwide Refrigeration business, discarded 4,500 shares on Wednesday at prices varying from $150.45 to $151.77 per share, cutting his stake to 105,368 shares. Last but certainly not least, Executive Vice President and Chief Financial Officer Joseph W. Reitmeier sold 9,700 shares on the same day at prices ranging from $150.30 to $151.62 per share, which trimmed his overall holding to 12,286 shares.

The major player in the heating, ventilation, air conditioning and refrigeration (HVACR) industry has seen the value of its stock appreciate by 20% so far in 2016. Lennox International Inc. (NYSE:LII)’s net sales for the second quarter increased by 3% year-over-year to $1.02 billion. Analysts believe there is significant pent-up demand in the HVAC market, as many of the units installed in the mid-2000’s amid the housing boom are reaching the end of their useful life and need replacement.

A total of 17 asset managers in our system were invested in Lennox International at the end of the March quarter. Cliff Asness’ AQR Capital Management owned 221,007 shares of Lennox International Inc. (NYSE:LII) on March 31.

More Insider Selling at Strong Performing Software Giant

The insider selling activity at Adobe Systems Incorporated (NASDAQ:ADBE) has been gaining steam in recent months, with two different insiders selling shares earlier this week (one of whom sold solely freshly-exercised stock options). In the other instance, John E. Warnock, a co-founder and co-chairman at Adobe Systems, discarded 2,000 shares on Wednesday at a price tag of $98.51 each, all of which were held by the Warnock Family Trust, which currently owns 579,115 shares. Dr. Warnock also holds a direct ownership stake of 16,088 shares.

The shares of the software giant are up by 2% in 2016 and by an impressive 247% over the past five years, as the company has successfully transitioned to a subscription-only model. Adobe Systems Incorporated (NASDAQ:ADBE) operates as a developer and marketer of software tools for creating, managing, measuring, and optimizing digital design content that used to be sold in physical formats for set fees. The transition to cloud computing has paid off handsomely for shareholders and corporate insiders, some of whom have been cashing out of their holdings as of late. In late June, the company reported record quarterly revenue of $1.40 billion for its second quarter of fiscal year 2016 ended June 3, marking year-over-year top-line growth of 20%.

The number of hedge funds in our database with long positions in Adobe Systems rose to 63 from 46 during the first quarter of 2016. Beech Hill Partners, run by Paul Cantor, acquired a new stake of 6,230 shares of Adobe Systems Incorporated (NASDAQ:ADBE) during the second quarter.

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