3 Companies Where Top Executives Are Cashing Out; Should Investors Be Worried?

It is no secret that insider selling at certain companies may raise red flags to current and potential investors of those companies. If I were a long-term oriented investor in a company, I would like to see that company’s insiders purchase more stock rather than sell their stock. Truth be told, I would be alarmed if that company’s insiders had started to cash out their holdings at a high pace. Of course, insiders can unload their holdings for numerous reasons that are not related to their companies’ future prospects and anticipated developments, but this type of activity can make investors lose confidence in the company and in its stock performance in particular. This article will display noteworthy insider sales registered at three U.S-listed companies and will also discuss the performance of those companies in the past several months.

Prior to discussing the insider trading activity, let’s make you familiar with what Insider Monkey does besides providing high-quality articles. We also 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 six 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. the S&P 500’s 48.7% gain) over the last 38 months (see the details here).

Let’s start off by looking into the heavy insider selling registered at TJX Companies Inc. (NYSE:TJX). Chairman and Chief Executive Officer Carol Meyrowitz reported selling 64,086 shares last Wednesday at prices ranging from $71.50-to-$71.66 per share, cutting her overall holdings to 378,960 shares. Carol Meyrowitz, who took the helm at TJX back in 2007, recently announced that she is stepping down as CEO and will become Executive Chairman effective January 31. The off-price retailer of apparel and home fashions has seen immense growth in terms of revenue over the past several years under the leadership of Meyrowitz. In mid-November, TJX Companies Inc. (NYSE:TJX) reported net sales of $7.8 billion for the third quarter, an increase of 5% year-over-year. Its diluted earnings per share came to $0.86, compared with $0.85 reported for the same quarter a year ago. TJX’s stock performance in November was greatly affected by its competitors’ disappointing third-quarter financial results, but the stock has bounced back quickly after the release of TJX’s own financial figures. The company’s high inventory turnover maintains the freshness of its stores’ merchandise, which explains the strong customer traffic and performance across all of its categories. Meanwhile, the stock is trading at a trailing price-to-earnings ratio of 21.52 (the ratio for the S&P 500 companies stands at 23.18), which suggests there could still be room for some growth. Principal Global Investors’ Columbus Circle Investors acquired a 1.56 million-share position in TJX Companies Inc. (NYSE:TJX) during the third quarter.

The next page of the article reveals the insider selling activity registered at Natus Medical Inc. (NASDAQ:BABY) and Marsh & McLennan Companies Inc. (NYSE:MMC).

Natus Medical Inc. (NASDAQ:BABY) saw one of its top executives unload shares last week. President and Chief Executive Officer James B. Hawkins sold 14,103 shares on Wednesday and 43,408 shares on Friday at prices between $48.80 and $49.34 per share. Following the recent transactions, the CEO currently holds a stake of 377,274 shares. The financial performance of the provider of newborn care and neurology healthcare products and services mainly depends on the global economic conditions, considering that its sales are highly correlated to the capital spending of U.S hospitals and the healthcare spending of government institutions outside the nation. The shares of Natus have gained 35% since the beginning of the year and are currently trading at an all-time high of over $48 a share, thanks to its spectacular financial performance.

Natus Medical reported net income of $10.9 million on consolidated revenue of $94.6 million for the third quarter, compared with $7.8 million in income on revenue of $89.9 million reported a year ago. This strong performance is mainly attributable to the company’s recent acquisitions and the organic growth realized in its Newborn Care business. Even so, it appears that this growth does not entirely justify the company’s rich trailing P/E ratio of 40.31, so Natus will have to keep delivering strong financial growth each quarter so as to satisfy its current shareholders. Ken Fisher’s Fisher Asset Management holds a 601,141-share position in Natus Medical Inc. (NASDAQ:BABY) as of September 30.

Let’s wrap up our discussion by examining the insider sales witnessed at Marsh & McLennan Companies Inc. (NYSE:MMC). Alexander S. Moczarski, Chief Executive Officer and President of Marsh & McLennan Companies’ reinsurance arm Guy Carpenter, discarded 25,509 shares on Wednesday at a sale price of $55.45 per share, trimming his stake to 39,267 shares. Marsh & McLennan Companies is the parent company of several risk experts and specialty consultants, including Guy Carpenter, and operates as a global professional services firm. The shares of the company are slightly more than 3% in the red year-to-date, after suffering a significant pullback in mid-August. Its consolidating revenue for the third quarter added up to $3.1 billion, which marked a decrease of 1% year-over-year. The foreign currency translation significantly impacted the company’s top-line, causing a 7% decrease in revenue year-over-year. Meanwhile, the stock is trading at a trailing P/E ratio of 20.11, which is slightly below the average for the companies included in the S&P 500.

The number of hedge funds with stakes in the company decreased to 26 from 32 during the third quarter. Ric Dillon’s Diamond Hill Capital cut its exposure to Marsh & McLennan Companies Inc. (NYSE:MMC) by 5% during the September quarter, remaining with 2.70 million shares.

Disclosure: None