Insider trading activity is often a misused and misunderstood market indicator. To many, the phrase conjures up images of infamous figures like Raj Rajaratnam or Martha Stewart, where cases of corporate greed and illegality were prosecuted by the SEC. In reality however, the overwhelming majority of all insider trades are 100% legal, and are reported to the federal government via Form 4 filings. Despite their atrocious reputation, the transactions performed by insiders can help individual investors profit quite handsomely. In fact, empirical studies have proven that individuals who mimic or “monkey,” insider trading activity can beat the market by an average of 7 percentage points a year. This strategy is no flash in the pan, as a statistically significant correlation between insider transactions and excess returns has been observed for the past half-century.
In recent weeks, we’ve seen a bevy of insider buying activity, though its also important to take a quick look at the bears’ sentiment as well. While insider selling isn’t as strong an indicator as purchases are, it is still something that investors should take seriously, as it’s foolish to assume that every insider sale is pure profit-taking. Some rounds of insider selling activity may be a sign that a particular company faces a difficult road ahead, whether its in the form of an earnings miss, an unwanted takeover, or a market overvaluation. Without further ado, here’s one stock that has seen insider selling as of late.
Sirius XM Radio Inc (NASDAQ:SIRI)
Sirius XM has been in the news quite a bit recently, as Liberty Media Corp (NASDAQ:LMCA) vies for a majority stake in the multi-billion broadcasting company. All of this drama began in 2009, when Liberty Media bailed Sirius XM Radio Inc (NASDAQ:SIRI) out of bankruptcy with a $530 million loan that gave it a 40% stake in the company. Three years later, a clause preventing Liberty from purchasing additional shares has expired, and its stake currently lies less than one percentage point away from the 50% threshold. While Sirius’s shareholders are determined to do anything in their power to prevent a takeover, whether through the form of “poison pill” or “macaroni” defenses, an agreement in the company’s bailout plan outlaws any anti-acquisitive measures.
Interestingly, one very prominent Sirius insider has been selling their shares as of late, and it’s worth delving a bit into the details. On the 17th, 18th, and 19th of this month, the company’s CEO Mel Karmazin sold a total of 20.36 million shares in stock worth a total of nearly $50 million. Karmazin’s Form 4 filings reveal that the majority of these sales were performed via stock options in the 50 cent range, allowing the executive to bank an instant return of 420 percentage points when he sold at them at the going market rate between $2.37-$2.57 a share.
These most recent transactions are part of a larger bearish trend for Karmazin, as he sold 15.95 million shares in August, and 7.8 million in July. Sirius XM Radio Inc (NASDAQ:SIRI)’s head honcho has recently said that his “instincts […] are Liberty does not need [him] at the company” once a likely takeover is complete. Even more intriguing is that the CEO stated that even he wasn’t aware of Liberty’s plans for Sirius once they acquire a majority stake, telling reporters that “we really don’t know what exactly their interest is … they are not talking to us.”
To put it simply, Karmazin’s sentiment toward Sirius XM combined with Liberty’s takeover efforts creates a massive amount of uncertainty for investors at the moment. Since the start of September, Sirius’s shares appear to be in a relatively stable holding pattern, generating a slight amount of positive appreciation over this time. They currently trade at parity with the radio broadcasting industry with respect to their earnings valuation (4.8X), and are actually below traditional peers like Corus Entertainment Inc. (PINK:CJREF) at 15.2X, and Cumulus Media Inc. (NASDAQ:CMLS) at 18.2X.
Sirius still sports a whopping PEG ratio of 4.89, despite expecting annual earnings growth of 25% a year over the next half-decade. Typically, a PEG above 2.0 signals an overvaluation. From a forward-looking perspective, shares of Sirius trade at a moderate Forward P/E of 25.9X, which is above both Cumulus and Corus, but one-twentieth the price of online competitor Pandora Media Inc (NYSE:P). Of the companies mentioned here, only Pandora has a higher EPS outlook, expecting to average 39.5% bottom line expansion over the next five years.
To conclude: Sirius XM Radio Inc (NASDAQ:SIRI) does not look exceptionally attractive from a valuation standpoint, and there is too much uncertainty regarding the takeover efforts of Liberty Media. Though most of Mel Karmazin’s stock sales look like profit-taking, investors can’t help but wonder if they’d be better off mimicking this insider.