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).

Brinker International Inc. (NYSE:EAT) also had two insiders offload shares earlier this week. To start with, Director George R. Mrkonic Jr. discarded 5,584 shares on Tuesday at a weighted average price of $46.98, cutting his total stake to 29,406 shares. Executive Vice President and Chief Development Officer Roger F. Thomson sold an 11,460-share block on the same day, at prices varying from $46.50 to $46.56 per share, trimming his overall holding to 93,952 units of common stock.

The shares of the owner and franchisor of the Chili’s Grill & Bar and Maggiano’s Little Italy restaurant brands are down by 22% over the past 12-month period, so the recent insider selling at the company might take some investors by surprise. However, these insiders might have waited for the waiver of trading restrictions so as to raise some cash for personal needs, so one should be careful when analyzing such activity. Just recently, Brinker International reported total revenue of $1.55 billion for the 26-week period that ended December 23, which denoted an increase of 6.7% year-over-year. The increase was mainly attributable to higher restaurant capacity from the acquisition of Pepper Dining, which more than offset the negative comparable restaurant sales. The company blames the toughening competition and heavy discounting in the casual dining industry for the slumping growth in sales and traffic. Specifically, Brinker’s management believes that the slow wage growth stands behind the declining restaurant visits. Nonetheless, the company’s Board recently increased its quarterly dividend payment by 14% to $0.32 per share, which might serve as bait for some investors. Most importantly, the stock has a forward P/E multiple of 11.71 and looks extremely cheap relative to the restaurants industry, which has a forward P/E of 24.40. David Harding’s Winton Capital Management sold off its entire 505,821-share stake in Brinker International Inc. (NYSE:EAT) during the final quarter of 2015.

Let’s wrap up our discussion by investigating the insider selling registered at Illinois Tool Works Inc. (NYSE:ITW). Director Kevin M. Warren discarded 5,500 shares on Monday at a price of $89.54 per share and currently owns 4,560 shares. The company has seen another insider sell shares since the beginning of the year, but the sale was made in connection with newly-exercised stock options.

The shares of the industrial giant have managed to recover from the severe pullback they experienced during the first two weeks of January, thanks to the company’s encouraging financial results for the fourth quarter, released towards the end of January. The multi-industry company reported operating revenue of $13.41 billion for 2015, down from $14.48 billion reported for the prior year. Its net income decreased to $1.90 billion from $2.95 billion reported for 2014. Even so, Illinois Tool Works expanded its operating margin by 150 basis points last year, to 21.4%. Let us remind you that the company started a five-year plan in 2012 to make the most of its business potential, setting particular performance goals such as achieving organic growth of 200 basis points above the global GDP and reaching an operating margin of roughly 23% by the end of 2017. Meanwhile, the company’s management anticipates 2016 full-year earnings per share in the range of $5.35 to $5.55, which would denote an increase of 6% year-over-year at the midpoint. Similarly, the organic revenue growth is estimated to be in the range of 1% to 3%. Ric Dillon’s Diamond Hill Capital owns 2.02 million shares of Illinois Tool Works Inc. (NYSE:ITW) as of the end of 2015.

Disclosure: None