Heavy Insider Selling That Can Raise Red Flags Detected At These 3 Companies

The Standard and Poor’s 500 Index slid into negative territory for the year on Thursday, after falling 1.5% in the first trading session after the Fed’s decision to raise interest rate. The decline in energy equities dragged down all major U.S. stock indexes on Thursday, all of which posted losses of more than 1%. In the meantime, some companies’ insiders have been cashing out their holdings ahead of the upcoming two holiday-shortened trading weeks. As a general rule, insider selling is primarily perceived as a bearish signal, but the increased usage of stock options as employee compensation has made this type of activity quite hard to interpret. Corporate insiders can sell shares for a wide variety of reasons that might not necessarily be related to their companies’ future prospects, but heavy insider selling can still raise red flags that investors should not overlook. The Insider Monkey team identified noteworthy insider sales at three companies, and this article focuses on investigating those sales and the performance of the companies in question.

Prior to discussing the insider trading activity, let’s make you familiar with what Insider Monkey does besides providing high-quality articles. We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about 6 basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. S&P 500’s 48.7% gain) over the last 38 months (see the details here).

Cisco Systems Inc. (NASDAQ:CSCO) has witnessed heavy insider selling activity in recent months, and had another executive sell big this week. Executive Vice President and Chief Development Officer Pankaj Patel reported selling 50,000 shares on Tuesday and 30,000 shares on Wednesday at prices that ranged from $26.67-to-$27.13 per share, all of which were held by a trust fund called Trust #1. After the recent sell-off, this trust fund holds 87,774 shares. The CDO also holds a direct ownership stake of 574,019 shares, along with an additional 128,005 shares and 28,368 shares owned by Trust #2 and Trust #3, respectively. Shares of Cisco are nearly 4% in the red year-to-date and trade at a trailing price-to-earnings ratio of 14.29, which is significantly below the average of 22.73 for the companies included in the S&P 500 benchmark. Even though the company generated revenue growth in the enterprise market for the first quarter of fiscal 2016, this market experienced depressed business momentum as a result of high macroeconomic uncertainty outside the United States. Cisco Systems Inc. (NASDAQ:CSCO) reported revenue of $12.68 billion for the first quarter of fiscal 2016, up 3.6% year-on-year. The price and product competition in the communications and networking industries has been intensifying in recent years, which might have put some pressure on Cisco’s financials. Donald Yacktman of Yacktman Asset Management cut his fund’s position in Cisco Systems Inc. (NASDAQ:CSCO) by 15% during the third quarter to 36.11 million shares.

The second page of this insider trading article reveals the noteworthy insider sales reported at CBRE Group Inc. (NYSE:CBG) and DCT Industrial Trust Inc. (NYSE:DCT).

CBRE Group Inc. (NYSE:CBG) is another company that recorded a high volume of insider selling this month. In fact, investors should be particularly cautious about the insider selling activity at CBRE, as five different insiders have sold shares so far this month. Director Richard C. Blum discarded 36,888 shares on Tuesday at a price of $35.56 per share, cutting his overall holding to 26,189 shares. The company’s CEO and CFO were also selling shares in the past several days, but their sales were conducted under trading plans. The world’s largest commercial real estate services and investment firm has seen its shares gain 3% in 2015, and they are currently trading at a trailing P/E ratio of 20.81. The company’s operations and financial performance in particular are highly dependent on economic trends and government policies that impact both global and regional commercial real estate markets. The availability of low-cost credit has injected dynamism into commercial real estate markets in recent years, but the rising interest rate environment might have an adverse effect on these markets’ growth over the medium- and long-term horizon. A number of 32 hedge funds tracked by Insider Monkey were invested in the company at the end of the third quarter, accumulating 15.60% of its outstanding shares. Jeffrey Ubben’s ValueAct Capital held its position in CBRE Group Inc. (NYSE:CBG) unchanged during the September quarter at 31.33 million shares.

DCT Industrial Trust Inc. (NYSE:DCT) had an influential insider discard shares this week. President Jeffrey F. Phelan sold 28,470 shares on Tuesday at exactly $37 apiece, trimming his overall stake to 28,470 shares. It should be mentioned that the President was piling up shares in mid-2011 at prices that did not exceed $4.50 a share (before the company completed a one-for-four reverse stock split). This industrial real estate company that focuses on acquiring and leasing bulk distribution and light industrial properties has seen its shares advance 5% this year, thanks to the 20% rally since the beginning of September. The industrial real estate market has been strengthening in recent years, mainly due to a general improvement in the U.S. economy, along with the growth of e-commerce and U.S.-based manufacturing. The REIT acquired 14 buildings during the first nine months of 2015 for roughly $124.9 million. The company’s total rental revenues for the nine-month period that ended September 30 totaled $264.27 million, as compared with $250.21 million reported a year ago. It is also worth pointing out that the company’s ten largest customers occupy only 9.6% of its properties, so DCT Industrial Trust is highly diversified when it comes to customers and does not have high risks associated with the potential loss of a major customer. Nonetheless, Credit Suisse recently has downgraded the stock to ‘Underperform’ from ‘Neutral’ and cut its price target to $39 from $40. Israel Englander’s Millennium Management is the largest shareholder of DCT Industrial Trust Inc. (NYSE:DCT) within our database, holding 3.11 million shares as of September 30.

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