What the Insider Selling at these Companies Could Tell Investors About Their Future

Most market participants do not pay too much attention to insider selling activity, as insiders may sell shares for various reasons unrelated to their companies’ prospects. The increased usage of stock options as part of employees’ compensation has distorted the data on insider trading behavior, which makes it close to impossible to accurately interpret insider selling. Nonetheless, insider selling might indicate insiders’ beliefs that their company’s stock price reflects current market conditions and that the stock is fairly valued. Similarly, heavy insider selling may suggest that the market conditions for a company are not anticipated to improve any time soon, so it does make sense to keep track of insider selling. However, individual investors need to focus on clusters of insider selling, which can be more telling than individual insider sales. The Insider Monkey team has identified three companies which registered noteworthy insider sales recently, one of which witnessed a cluster of insider selling that investors should make note of.

Prior to discussing the insider trading activity, let’s make you familiar with what Insider Monkey does. At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period, hedge funds’ top small-cap stocks beat the S&P 500 index by double digits annually (read the details here).

Cintas Corporation (NASDAQ:CTAS) saw one of its most influential insiders sell big last week. According to a Form 4 filing, President and Chief Operating Officer James P. Holloman sold 7,462 shares last Friday at a price of $85.74 per share. Following the recent selloff, the President holds an ownership stake of 107,219 shares. The provider of corporate identity uniforms and other related business services has seen its stock price appreciate by 7% over the past year or so, thanks to the strong organic growth that it realized last year. Cintas Corporation (NASDAQ:CTAS) reported total revenue of $2.42 billion for the six months that ended November 30, up by 8.7% year-over-year. The company’s top-line figure increased organically by 6.6% year-over-year due to higher sales volume. Its diluted earnings per share from continuing operations reached $1.96, which represented a 12.0% year-over-year rise. Nevertheless, some investors might find Cintas Corporation’s stock relatively expensive at the moment if bearing in mind the company’s valuation metrics. The stock trades at a forward price-to-earnings ratio of 19.39, which is visibly above the average of 15.75 for the companies included in the S&P 500 Index. Meanwhile, 27 smart money investors monitored by Insider Monkey were shareholders of the company at the end of September, stockpiling 11% of its outstanding common stock. First Eagle Investment Management is the largest shareholder of Cintas Corporation (NASDAQ:CTAS) within our database, holding 8.22 million shares as of September 30.

Let’s head to the next two pages of this insider trading article, where the insider sales registered at Tech Data Corp (NASDAQ:TECD) and General Communication Inc. (NASDAQ:GNCMA) are discussed.

Tech Data Corp (NASDAQ:TECD) also had an insider offload shares this week. Director David M. Upton reported selling 1,572 shares on Monday at prices that ranged from $61.64 per share to $61.76 per share. After the recent sale, the Director holds an ownership stake of 13,984 shares, which includes 1,751 unvested restricted stock units (RSUs). Even though this insider sale is not overly significant, the timing of the trade might raise red flags for some investors. The stock has been sliding since mid-November, and the recent sale might suggest that there are no positive developments anticipated any time soon (or that the trading window for insiders had been shut down until this week). Even so, the shares of the wholesale distributor of technology products are up by 6% over the past year and trade at attractive P/E ratios.

Tech Data’s consolidated net sales for the first nine months of fiscal year 2016 totaled $18.90 billion, down by roughly 7% compared to the same period of fiscal year 2015. The decrease might serve as reason for concern for some investors, but they should keep in mind that the decrease was mainly attributable to the strong U.S dollar and the exiting of its operations in Chile, Peru and Uruguay. Excluding these two factors, the company’s net sales increased by roughly 5% year-over-year. In the meantime, the stock trades at a forward P/E ratio of 10.31, which is substantially below the ratio for the S&P 500. The hedge fund sentiment towards the stock improved noticeably during the third quarter, as the number of top money managers with positions in the company climbed to 25 from 20 quarter-over-quarter. Joel Greenblatt’s Gotham Asset Management holds 878,261 shares of Tech Data Corp (NASDAQ:TECD) as of September 30.

General Communication Inc. (NASDAQ:GNCMA) has had several insiders sell shares so far this year, so this is the type of insider trading activity investors should watch out for. Executive Vice President and Chief Operating Officer Gregory F. Chapados sold 6,022 Class A shares on Tuesday and 8,978 shares on Wednesday, at prices ranging from $19.10 per share to $19.30 per share, trimming his stake to 513,290 shares. Moreover, Tina M. Pidgeon, General Counsel, Chief Compliance Officer, and Senior Vice President, unloaded 7,600 shares last Thursday at a weighted average price of $19.52 and currently owns 357,479 shares.

General Communication is a telecommunications corporation that operates in Alaska; as a result, its financial performance is highly dependent on the region’s economic conditions. By the same token, the economic conditions in Alaska are highly correlated with the state of the oil industry, which has worsened significantly in the past several months. It is highly likely that the depressed crude oil price environment, which is likely to stick around for several years, could negatively impact the demand for General Communication’s products and services. Might it be the case that the firm’s insiders are cashing out in anticipation of worsening economic conditions for the state and company? Only time will tell. In the meantime, the stock has gained 22% over the past year despite experiencing a significant pullback in December. A total of 13 hedge funds in our system had stakes in the company at the end of the September quarter, up from ten reported as of the end of the prior one. John C. Walker’s Stonerise Capital Management added a 500,000-share position in General Communication Inc. (NASDAQ:GNCMA) to its portfolio during the September quarter.

Disclosure: None