Do Large Insider Sales Signal Trouble Ahead?

12/03/2013 7:00 am EST

Focus: STOCKS

With insider selling on the rise, we decided to screen for some of the biggest transactions, writes James Dennin on Kapitall.com.

A new study from the University of Michigan suggests that insider selling might be approaching its highest levels in over 30 years. The culprit is likely a runaway stock market, which has sent some companies, particularly tech stocks, through the roof.

Many of the biggest sales have involved some of the S&P's biggest winners for the year: Netflix (NFLX) and Tesla (TSLA).

Now insider trading has a bad rap. It's only actually illegal when you trade based on knowledge that isn't available to the public. There are many gray areas here, including what it means to be an “insider.” While the government counts any shareholder of 5% or more among that group—simply owning a lot of stock doesn't necessarily mean you have any special insights into the company.

Many researchers stress the importance of looking at who is selling their stock, in addition to how much they're selling. Sometimes people just need some cash. And after all—lots of investors would probably see good reason to sell a stock if it were up several hundred percent for the year.
However, selling trends might suggest something important, depending on the context. To return to the example of Netflix, some analysts are arguing that sales by the company's CEO, CFO, chief content officer, chief product officer, chief streaming officer, chief talent officer, chief communications officer, its general counsel, two members of its board of directors...are hard to ignore.

Either way, these trends may be worth paying attention to, especially as the market keeps going up. So we assembled a list of stocks with some of the biggest changes to insider ownership: we found nine with a decline in insider ownership above 90% over the last six months.

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Do insider sales suggest trouble ahead for these companies? Use the list below to begin your analysis.

1. Audience, Inc. (ADNC): Provides intelligent voice and audio solutions for mobile devices worldwide. Market cap at $215.71M, most recent closing price at $9.97. Insider ownership has declined 96.72% in the last six months.

2. Broadwind Energy, Inc. (BWEN): Provides products and services to the energy, mining, and infrastructure sector customers primarily in the United States. Market cap at $98.93M, most recent closing price at $6.86. Insider ownership has declined 92.97% in the last six months.

3. Five Below, Inc. (FIVE): Operates as a specialty value retailer in the United States. Market cap at $2.74B, most recent closing price at $51.34. Insider ownership has declined 95.91% in the last six months.

4. Penn Virginia Corporation (PVA): Engages in the exploration, development, and production of natural gas and oil in various domestic onshore regions of the United States. Market cap at $628.99M, most recent closing price at $10.0. Insider ownership has declined 95.17% in the last six months.

5. Rosetta Stone, Inc. (RST): Provides technology-based language learning solutions primarily in the United States and internationally. Market cap at $270.44M, most recent closing price at $12.39. Insider ownership has declined 99.65% in the last six months.

6. Sprouts Farmers Market, Inc. (SFM): Engages in the retailing of natural and organic food in the United States. Market cap at $5.B, most recent closing price at $39.66. Insider ownership has declined 98.62% in the last six months.

7. Sonus Networks, Inc. (SONS): Provides voice and data infrastructure solutions for wireline and wireless telephone service providers. Market cap at $784.58M, most recent closing price at $2.81. Insider ownership has declined 90.45% in the last six months.

8. WageWorks, Inc. (WAGE): Provides tax-advantaged programs for consumer-directed health, commuter, and other employee spending account benefits (CDBs) in the United States. Market cap at $1.84B, most recent closing price at $53.90. Insider ownership has declined 98.16% in the last six months.

9. Xoom Corporation (XOOM): Provides consumer-to-consumer online money transfers services. Market cap at $941.86M, most recent closing price at $27.80. Insider ownership has declined 91.21% in the last six months.

(Analyst ratings sourced from Zacks Investment Research. Insider transactions sourced from Finviz.)

By James Dennin of Kapitall.com

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