Research shows that corporate insiders tend to time the markets well when it comes to buying their company’s shares, thanks to their contrarian approach to investing and superior information advantage. While it’s not a guarantee that an individual investor will generate similar returns by mimicking certain insider trades, there is evidence to support the monitoring of insider trading behavior. Some studies on insider trading suggest that companies with strong insider selling usually generate lower stock returns than companies witnessing insider buying. Heavy insider selling does not necessarily suggest that a stock is poised to plummet in the near future, but this type of activity can serve as a general indication that insiders do not anticipate any major positive developments in the future. The Insider Monkey team thoroughly examined the pool of Form 4 filings submitted on Tuesday and identified three companies that witnessed noteworthy insider sales during the past several days.
Prior to discussing the insider trading activity, let’s make you familiar with what Insider Monkey does. At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period, hedge funds’ top small-cap stocks beat the S&P 500 index by double digits annually (read the details here).
Philip Morris International Inc. (NYSE:PM) had one of its most influential insiders unload shares this past week. Chairman Louis C. Camilleri reported selling 80,000 shares on Friday at prices in the range of $87.46 to $89.25 per share, cutting his overall holding to 833,340 shares. The updated stake includes 15,526 deferred shares.
The shares of the tobacco company are up by 9% over the past 12 months even though tobacco use has been declining in recent years. The company’s cigarette shipment volume totaled 847.3 billion units for 2015, down by 1% year-over-year, excluding acquisitions. At the same time, its reported diluted earnings per share in 2015 reached $4.42, down by 7.1% year-over-year. Although numerous small- and large-scale investors tend to refrain from investing in “sin” stocks such as Philip Morris, there are several major reasons for investing in these stocks. Philip Morris International Inc. (NYSE:PM) operates in a highly-regulated industry that has high barriers of entry, and PMI’s sizable market share gives it a strong competitive advantage over current and new players in said industry. Furthermore, Philip Morris and other tobacco companies tend to have extremely loyal customers, who buy cigarettes even during periods of economic hardship. Most importantly, Philip Morris pays out an annualized dividend of $4.08 per share, which results in a current dividend yield of 4.55%. In the meantime, the stock trades at a forward P/E multiple of 18.86, which is slightly below the ratio of 19.40 for the consumer staples sector. Given that PMI anticipates its international cigarette volume, excluding China and the United States, to decline in the range of 2.0% to 2.5%, the Chairman’s recent sale appears to be well-timed. Andy Brown’s Cedar Rock Capital owned 12.45 million shares of Philip Morris International Inc. (NYSE:PM) on September 30.
The next two pages of this daily insider trading article discusses the insider selling activity observed at C.H. Robinson Worldwide Inc. (NASDAQ:CHRW) and Take-Two Interactive Software Inc. (NASDAQ:TTWO).