Why Are Insiders Ditching Shares Of These Companies?

Insider trading activity has been diminishing over the past few weeks with the kick-off of the third quarter earnings season. Insider buying activity weakened significantly during the previous trading week, while insider selling was weak as well. Statistics reveal that the ratio of insider buying to insider selling decreased last week, which implies that insiders were selling at a greater rate in comparison to buying than previously. Of course, this is not necessarily a good sign for the U.S equity markets, as insiders’ trades might be pointing to dwindling confidence in their companies’ prospects. Even so, one should not forget that insiders might sell stock for numerous reasons unrelated to their companies’ outlook, so the decreasing insider buying/selling ratio should not be directly interpreted as a bearish sign. Moving on to the underlying purpose of this article, the Insider Monkey team pinpointed three companies with an unusual volume of insider selling, so we will attempt to stipulate whether these sales were driven by any firm-specific issues and what that might mean for other investors.

Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35%-to-45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. 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 the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 102% over the ensuing three years, outperforming the S&P 500 Index by more than 53 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.

Let’s begin our discussion with Finish Line Inc. (NASDAQ:FINL), a specialty retailer of athletic shoes, apparel, and accessories. Samuel M. Sato, who has served as President since October 2014, reported selling 5,565 shares last Wednesday at a price of $18.89 per share. The company’s President currently owns 40,756 shares valued at approximately $761,300. The shares of Finish Line Inc. (NASDAQ:FINL) are 23% in the red year-to-date, mainly owing to the disappointing second quarter earnings report the company released at the end of September. The retailer posted net sales of $483.2 million, which increased 3.5% year-over-year. At the same time, the company’s diluted earnings per share came to $0.57, compared to $0.54 reported a year ago. However, these figures were not well received by the market, which expected greater top-line growth. Earlier this month, Goldman Sachs Group Inc. (NYSE:GS) upgraded the stock to “Neutral” from “Sell”, with a price target of $20.00. Balyasny Asset Management, founded by Dmitry Balyasny, added an 830,872-share position in Finish Line Inc. (NASDAQ:FINL) to its portfolio during the June quarter.

The next page will discuss the insider trading at the other two companies mentioned above, one of which will disclose its third quarter earnings report today after the market closes.

We turn our attention to oil and gas exploration, development, and production company Ring Energy Inc. (NYSEMKT:REI). President and Director David A. Fowler unloaded a 13,000-share chunk of stock on Wednesday at $10.26 apiece. After the recent sale, the President holds exactly 102,000 units of common stock. Surprisingly, Ring Energy Inc. (NYSEMKT:REI)’s stock is nearly 2% in the green year-to-date, whereas the oil and gas drilling and exploration industry has lost more than 25% on aggregate since the beginning of the year. The company’s second quarter earnings report was well received by the market even though its oil and gas revenues decreased to $8.98 million from $11.20 million year-over-year. Ring Energy’s net income also declined to $534,167, compared to $2.82 million a year ago. However, it appears that market participants had previously anticipated even worse figures. All-in-all, it is no surprise that the President is selling shares at this point in time, when the company’s stock is greatly outperforming its industry peers. David Zusman’s Talara Capital Management reported owning roughly 892,000 shares in Ring Energy Inc. (NYSEMKT:REI) through its 13F filing for the June quarter.

Finally, we will take a look at the insider trading activity at First Defiance Financial (NASDAQ:FDEF). Chairman William J. Small reported the sale of 1,250 shares on Thursday at prices ranging from $36.41-to-$36.66, all of which were held by a trust fund. After the recent transaction, the Chairman holds a direct ownership stake of 51,544 shares, along with an additional 49,490 share held indirectly through the aforementioned trust fund. It is important to note two features related to this insider selling activity; firstly, the shares of the holding company for First Federal Bank of the Midwest are nearly 12% in the green year-to-date. Secondly, First Defiance Financial (NASDAQ:FDEF) is set to release its third quarter earnings report today, October 19, after the market closes. Therefore, it remains to be seen whether the recent insider selling activity is somewhat related to the upcoming earnings release, which is highly unlikely considering insider trading regulations. Jim Simons’ Renaissance Technologies represents the largest stockholder of First Defiance Financial (NASDAQ:FDEF) within our database, holding almost 204,000 shares as of June 30.

Disclosure: None