Three Companies with Clusters of Insider Selling That Are Hard To Ignore

Individual investors use various trading strategies and follow different investment philosophies, so they usually tend to look at a wide range of aspects when deciding whether to buy, keep or sell certain companies’ shares. Examining insider trading behavior is one aspect investors need to take a close look at, as insider sentiment usually serves as an accurate indicator of future stock performance. It is widely known that corporate insiders usually buy low and sell high, and their contrarian approach to investing enables them to beat stock market gauges. Meanwhile, heavy insider selling at a certain company might suggest that insiders believe that the company has reached a fair valuation, as well as may suggest that insiders anticipate softening market conditions. However, investors should keep in mind that insiders can sell shares for various reasons, which include personal cash needs, tax payments, to name just a few. Even so, if I were investing my cash into a company’s stock, I would certainly be troubled by heavy insider selling at that company. So abundant insider selling may cause some investors to run for the exits even though insiders’ decisions to cash out may not necessarily be related to any firm-specific developments. With that in mind, the following article will discuss three companies that had registered a relatively high volume of insider selling in recent weeks, so let’s have a brief look at those three companies.

Prior to discussing the insider trading activity, let’s make you familiar with what Insider Monkey does. We determine hedge fund sentiment by analyzing the equity portfolios of some of the best-performing hedge funds and institutional investors. Through extensive research, we have determined that the due diligence that these investors employ, as well as their long-term focus makes them perfect targets to emulate. However, the results of our analysis have also showed that the small-cap picks of these funds can generate much better returns, with the 15 most popular small-cap stocks beating the market by an average of 95 basis points per month (read more details here).

To begin with, the insider selling activity at Honeywell International Inc. (NYSE:HON) has been intensifying over the past several months, with numerous directors and executives selling shares throughout 2015 and at the beginning of 2016. Of course, some insider sales were executed as a result of planned selling and options expirations, but there was some insider selling that may raise red flags. David M. Cote, Chairman and Chief Executive Officer since July 2002, sold out his entire direct ownership stake of 344,936 shares last Tuesday at prices that ranged from $104.47 to $105.67 per share. The CEO holds an indirect ownership stake of 76,802 shares through a trust fund, as well as 23,989 shares held in a 401(k) plan. An additional 247,452 shares are held in a grantor retained annuity trust. Therefore, the aforementioned insider sales might suggest that diversified technology and manufacturing company has indeed reached a fair valuation.

The shares of Honeywell have advanced 84% over the past five years and are flat in the past 12 months, so the “fair valuation” thesis might not be entirely erroneous. In fact, the stock is priced at 14.40 times expected earnings, slightly below the forward P/E multiple of 15.40 for the Industrial Machinery industry. Just recently, Honeywell International Inc. (NYSE:HON) released more details about the merger proposal made to United Technologies Corporation (NYSE:UTX). Honeywell offered $42.63 per share in cash and 0.614 shares of Honeywell for each share of United Technologies; a merger that could result in annualized cost synergies of $3.5 billion. Considering a possible merger between the two companies and bearing in mind Honeywell’s $2.38 annual dividend payment, it might be a good idea for investors to hold onto their investment in the company. The number of hedge funds from our system with stakes in the company climbed to 49 from 46 during the final quarter of 2015. Ken Griffin’s Citadel Advisors owns 4.53 million shares of Honeywell International Inc. (NYSE:HON) as of December 31.

The next pages of this article discusses the recent insider selling activity witnessed at Lear Corporation (NYSE:LEA) and Lockheed Martin Corporation (NYSE:LMT).