Most investors would agree that tracking insider trading activity should play an important role in one’s stock selection and analysis process. After all, executives and Board members have more in-depth knowledge and up-to-date information on how their companies are performing and how they are likely to perform in the future than anyone else. Of course, there is no corporate insider who can flawlessly tell how undervalued or overvalued his or her company’s shares are, but these highly-informed individuals do have a better understanding of where their companies are heading than any of us.
Stock prices change rapidly based on the environment in the equity markets, but the underlying value of a business doesn’t change that fast. And there is good reason to believe corporate insiders are very good at capitalizing on this discrepancy. It is also commonly known that insiders sell shares for numerous reasons, many of which have nothing to do with their companies’ future prospects or intrinsic value. However, insider sales may occasionally suggest that insiders do not expect any significant positive developments at their companies in the near future, so keep in mind the concept of opportunity cost when tracking insider selling. With this in mind, the following article will discuss the insider selling activity registered at three companies earlier this week.
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 imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).
Insider Selling Registered at U.S. Regional Railroad After Q2 Earnings Release
Kansas City Southern (NYSE:KSU) has witnessed two executives unload shares this week, so let’s have a look at the people behind the recent insider selling at the company. David L. Starling, who recently stepped down from his role as Chief Executive Officer at the railway company after nearly six years on the job, discarded 5,100 shares on Wednesday at prices ranging from $98.77 to $98.91 per share. Mr. Starling, who will serve as Senior Advisor to the CEO through the end of 2016, currently owns 121,572 shares. William J. Wochner, Chief Legal Officer and Senior Vice President, unloaded 26,521 shares on the same day at prices that fell between $98.03 and $98.90 per share, cutting his ownership to 21,121 shares.
The recent insider selling comes shortly after North America’s fourth-largest railroad based on revenue released better than expected earnings for the second quarter. Kansas City Southern (NYSE:KSU)’s revenue decreased by 3% year-over-year to $568.5 million, mainly due to a decrease in revenue per carload/unit as a result of the weakening of the Mexican peso against the greenback and lower fuel surcharges. The company reported net income of $120.1 million, or $1.11 per diluted share for the quarter, up from $111.8 million, or $1.01 per diluted share recorded a year earlier. The weakening of the Mexican peso against the U.S dollar and lower fuel prices led to lower operating expenses.
There were 34 hedge fund vehicles followed by Insider Monkey with equity investments in the railroad company at the end of March, which amassed nearly 10% of its outstanding shares. Kansas City Southern’s shares have gained an impressive 30% since the start of 2016. Ken Fisher’s Fisher Asset Management cut its stake in Kansas City Southern (NYSE:KSU) by 2% during the June quarter to 687,393 shares.
The second page of this article will discuss the fresh insider selling registered at two other companies.