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).

Lear Corporation (NYSE:LEA) had ten different executives unload shares last week, which could make even the most resilient investor worry about the company’s future stock performance. So let’s take a quick look at several noteworthy insider sales reported by Lear’s insiders. To start with, Senior Vice President and Chief Financial Officer Jeffrey H. Vanneste offloaded 12,401 shares last Thursday and 19,917 shares during the following day at a weighted average price of $103.86 and cut his stake to 12,869 shares. Melvin L. Stephens, Senior Vice President of Communications, Corporate and Investors Relations, discarded 17,146 shares last week at a weighted average price of $103.86, trimming his overall holding to 40,000 shares. More importantly, President and Chief Executive Officer Matthew J. Simoncini offloaded 123,162 shares last week at an average price of $103.86 and currently owns 42,341 shares. An additional 43,776 shares were sold by Executive Vice President and President of Seating, Raymond E. Scott, who continues to own 16,152 shares.

The Tier one supplier to the automotive industry has seen its shares decline 17% year-to-date, presumably because of worries that the auto industry might have peaked already. Lear Corporation generated net sales of $18.21 billion in 2015, up from $17.73 billion in 2014 and $16.23 billion in 2013. At the current share price level, the supplier of automotive seating systems and electrical power management systems appears to have a very cheap valuation. For instance, the stock trades at a forward P/E ratio of 7.62, which is below the average forward P/E of 9.8 for the Auto Parts and Equipment industry and substantially below the average of 15.75 for the S&P 500. The number of hedge funds monitored by our team with stakes in the company declined to 35 from 38 during the December quarter. Cliff Asness’ AQR Capital Management lifted its stake in Lear Corporation (NYSE:LEA) by 29% during the fourth quarter to 1.37 million shares.

Lockheed Martin Corporation (NYSE:LMT) had three different insiders sell shares over the past week or so. Richard F. Ambrose, Executive Vice President of Lockheed Martin’s Space Systems Company business area, sold out his entire direct ownership stake of 22,103 shares last Friday at prices that ranged from $213.30 to $214.37 per share. Dale P. Bennett, Executive Vice President of the company’s Mission Systems and Training business area, sold 6,000 shares on Monday at prices ranging from $215.05 to $215.42 per share. The EVP also sold 10,800 freshly-exercised options on the same day. After the recent transactions, the executive holds a stake of 17,387 shares. Last but not least, Richard H. Edwards, Executive Vice President of Lockheed Martin’s Missiles and Fire Control business area, discarded 20,000 shares on the same day at prices that fell between $214.70 and $216.63 per unit and trimmed his stake to 2,653 shares.

The global security and aerospace company offers products and services with defense, civil and commercial applications, while its main customers are represented by agencies of the U.S. Government. In fact, 78% of the company’s 2015 net sales were generated from the U.S. Government. The shares of Lockheed Martin have advanced 7% over the past 52 weeks and are priced at 16 times expected earnings. This compares with the forward P/E multiple of 15 for the Aerospace and Defense industry. The company had $46.13 billion in net sales last year, up from $45.60 billion reported for 2014. A total of 37 hedge funds from our database were invested in the company at the end of December 2015. First Eagle Investment Management reported owning 1.82 million shares of Lockheed Martin Corporation (NYSE:LMT) through its latest 13F filing.

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