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Should The Insider Selling At These Companies Give Cause For Concern?

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The third quarter earnings season is just about to kick off and many tend to believe that the market will experience an “earnings recession”, a term that implies two straight quarters with earnings declines. In fact, the estimated third-quarter S&P 500 earnings decline is 3.9%, according to Thomson Reuters data. The weak oil prices, the relatively strong U.S dollar, and the flagging global demand stand behind the anticipated decline, which will put even more downward pressure on U.S equities. The Standard and Poor’s 500 Index has dropped by 8.57% from its all-time high registered on May 21, and the third quarter earnings season might lead to a further widening of this loss. In the meantime, some companies’ insiders have been aggressively unloading their stakes lately, which could suggest that the future outlook of their companies looks very grim at the moment. This article will be discussing the insider selling activity at Cantel Medical Corp. (NYSE:CMN), NV5 Holdings Inc. (NASDAQ:NVEE), and Korn/Ferry International (NYSE:KFY). Given that insider selling may be unrelated to companies’ prospects, we will attempt to decipher the reasoning behind each insider’s move.

Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. 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 the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned 118% over the ensuing 36 months, outperforming the S&P 500 Index by 60 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.

To begin with, Cantel Medical Corp. (NYSE:CMN) had two insiders sell stock over the past month or so. Director Mark N. Diker reported selling 10,000 shares last week at prices ranging from $56.48 to $56.90. After the recent sale, the director currently owns 448,771 shares, along with indirect ownership of 45,624 shares. Similarly, the Chairman of Cantel Medical’s Board of Directors, Charles M. Diker, unloaded 27,415 shares last week at prices in the range of $55.35 to $57.00, trimming his stake to 3.21 million shares. Just a few days ago, Candel Medical reported its financial results for its fiscal fourth quarter and full fiscal year 2015 that ended July 31, delivering record sales of $565.00 million in 2015. This marked a sales increase of 16% year-over-year. At the same time, the company’s GAAP net income for the year came to $47.95 million or $1.15 per diluted share, compared to $43.27 million or $1.04 reported a year ago. Let’s not forget to mention that the shares of Cantel Medical have advanced by over 21% year-to-date, so it is hard to stipulate why these insiders cut down on their holdings. Mario Gabelli’s GAMCO Investors is among the largest shareholders of Cantel Medical Corp. (NYSE:CMN) within our database, holding slightly more than 309,000 shares.

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