Some retail investors may ask why anyone would track insider selling activity. While retail investors may not be able to generate noteworthy profits by shorting stocks with insider selling activity, past research provides evidence that companies with heavy insider selling do tend to underperform companies with noteworthy insider buying, so it does pay to keep track of insider selling as well. Insider Monkey interprets clusters of insider selling or even robust individual insider sales as a sign that companies could be approaching a fair valuation. Most analysts, numbers-crunchers at financial hubs, and hedge fund analysts employ various valuation models to estimate the “fair” value of particular companies, which involves numerous assumptions and projections. However, corporate insiders appear to have their own valuation models that are based on their own perceptions, which has proven to be more accurate than the ones employed by non-insiders. Having this in mind, we will examine some mild insider selling registered at three companies, as well as discuss the performance of those companies.
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Let’s start off our discussion by looking into the recent insider trading activity at Applied Materials Inc. (NASDAQ:AMAT). Susan M. James, a member of the company’s Board of Directors since December 2009, discarded 8,980 shares on Wednesday at prices that ranged from $20.73 to $20.86 per share, trimming her overall holding to 70,373 shares. Analysts at D.A. Davidson & Co. downgraded Applied Materials on the same day to ‘Neutral’ from ‘Buy’, saying that the shares of the semiconductor company have enjoyed a “meaningful” run in recent months, as shares have risen from $17 at the beginning of February to nearly $21, closing in on D.A. Davidson & Co.’s price target of $23 on the stock. The recent rate downgrade appears to support our thesis that insider selling serves as a sign of a stock approaching a fair valuation based on current circumstances (these can of course change at any time, for better or worse).
Applied Materials Inc. (NASDAQ:AMAT) is a provider of manufacturing equipment, services and software to the semiconductor, display, solar photovoltaic (PV) and other related industries. The company’s financial and stock performance are highly dependent upon the global demand for semiconductors, which is consequently driven by end-user demand for electronic products. The major customers of the semiconductor equipment maker include Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) (13% of net sales for the first quarter of fiscal year 2016 that ended January 31), Micron Technology, Inc. (NASDAQ:MU) (11%), and Samsung Electronics Co. (10%). Considering that TSMC and Samsung produce the A9 chips used in Apple Inc. (NASDAQ:AAPL)’s newest iPhones, Applied Materials will most likely continue to grow in the upcoming quarters, thanks to the launch of the iPhone SE. Moreover, it is believed that Apple intends to switch to an OLED (organic light-emitting diode) display from the current LCD (liquid crystal display) screen, which will possibly add more business for Applied Materials. However, it should also be noted that another Apple supplier, Foxconn, recently purchased Sharp and will reportedly begin producing AMOLED displays, making it the potential frontrunner to supply screens for Apple’s rumored 5.8″ AMOLED curved-screen iPhone planned for 2017.
Shares of Applied Materials are up by 11% since the beginning of 2016 and change hands at around 12.9-times expected earnings, beneath the forward P/E multiple of 14.3 for the Semiconductor Equipment sector. The company distributes an annualized dividend of $0.40 per share, which equates to a current dividend yield of 1.9%. The smart money sentiment towards the semiconductor company declined in the final quarter of 2015, with the number of funds invested in the company shrinking to 41 from 54 quarter-over-quarter. Larry Robbins’ Glenview Capital trimmed its stake in Applied Materials Inc. (NASDAQ:AMAT) by 58% during the December quarter, ending 2015 with 8.24 million shares.