Why Are These 3 Companies’ Insiders Dumping Shares?

As a general rule, investors pay much more attention to insider buying than insider selling, citing increased use of equity-based compensation by U.S companies. Indeed, executives and other insiders receive a high portion of their compensation in restricted stock units and stock options. Moreover, insiders tend to cash out a high portion of these awards (when vesting) to diversify their holdings or simply use the cash for personal needs. Of course, the increased use of equity-based pay has distorted the statistics concerning insider trading behavior, but insider selling still represents an important element investors should consider when analyzing particular companies. To support this idea, research suggests that companies with heavy insider selling underperform companies with insider buying activity, so insider selling is indeed worth monitoring. The Insider Monkey team examined dozens of Form 4 filings submitted with the SEC on Wednesday and pinpointed three companies that witnessed noteworthy insider selling that occurred over the past several days.

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).

Sally Beauty Holdings Inc. (NYSE:SBH) is amongst the pool of companies that witnessed a high volume of insider selling this week, having two different insiders sell shares during the first two trading windows of this week. Director Marshall E. Eisenberg offloaded 19,055 shares on Monday through multiple open market transactions at prices ranging from $29.78 to $30.39 per share, trimming his stake to 80,000 shares. Additionally, Director Edward E. Rabin sold 10,000 shares on Monday and 7,000 shares on Tuesday at prices between $30.17 and $30.49 per share, all of which were held by a trust fund. The Director’s wife also sold 2,300 shares on Monday and currently owns 10,000 shares. After the aforementioned sales, the trust fund currently holds an ownership stake of 56,000 shares, while the Director holds a direct ownership stake of 9,771 shares.

The distributor of professional beauty supplies mainly operates through two business segments: Sally Beauty Supply, which operates stores that target retail consumers and salon professionals, and Beauty Systems Group (BSG), which solely focuses on salons and salon professionals. Sally Beauty Holdings Inc. (NYSE:SBH)’s shares are up by 19% over the past three months after having gained nearly 8% so far in 2016. The recent surge in the company’s share price was mainly due to stronger-than-expected financial results for the first quarter of fiscal year 2016 that ended December 31. The beauty supplies company generated consolidated net sales of $998.03 million during the quarter, up from $964.47 million reported for the same period of the prior fiscal year. The top-line growth reflects an increase of 3.9% in same-store sales, which compares with the growth figure of 2.3% reported for the quarter that ended December 31, 2014. To be more detailed, the same-store sales growth was driven by an increase in average unit prices in both operating business segments and higher customer traffic in the BSG segment. One final note on Sally Beauty Holdings is that the stock currently trades at a forward P/E multiple of 15.75, which is slightly below the average of 16.70 for the consumer discretionary sector. Mario Gabelli’s GAMCO Investors reported owning 1.00 million shares of Sally Beauty Holdings Inc. (NYSE:SBH) through the current round of 13Fs.

Let’s move on to the next two pages of this article, which reveal the insider selling activity at Brinker International Inc. (NYSE:EAT) and Illinois Tool Works Inc. (NYSE:ITW).