Are Insiders Selling These 3 High-Potential Stocks Too Early?

The fourth-quarter earnings season is underway and investors are hoping that stronger-than-expected corporate earnings might change the disappointing course of U.S equities thus far in 2016. According to FactSet, the fourth-quarter S&P 500 earnings are anticipated to decline by 5.3% year-over-year, so the benchmark is on track to post the third consecutive year-over-year decline in earnings. A stronger U.S dollar, sluggish Chinese growth and declining crude oil prices are the main factors that might weight on fourth-quarter corporate earnings. As the number of companies reporting earnings will be increasing in the upcoming days and weeks, one might anticipate decreasing insider trading activity. As a general rule, investors find insider buying more informative than insider selling, but the latter type of activity should not be overlooked by any means. If I were investing my hard-earned money into a company’s stock, I would definitely be troubled by heavy insider selling at that company. For that reason, this article will reveal several noteworthy insider sales reported at three companies, and will also discuss the recent performance of those companies.

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).

Red Hat Inc. (NYSE:RHT) is among the companies that witnessed strong insider selling in the past several days. Director William S. Kaiser sold 18,972 shares on Friday at prices ranging from $80.00-to-$80.42 per share. After the recent sizable sale, the Director continues to hold an ownership stake of 129,879 shares. The provider of open source software solutions was among the best-performing software stocks in 2015, returning 19.77% for the year. Open source software represents an alternative to proprietary software, and Red Hat Inc. (NYSE:RHT) has become the face of this model of developing commercial software code. The company has grown at a high pace over the past several years, and so has its valuation. The stock trades at an extremely high forward price-to-earnings ratio of 36.03, compared to the average of 15.75 for the companies included in the S&P 500.

In mid-December, Red Hat released its financial results for the third-quarter of fiscal year 2016, which were greeted positively by investors. Red Hat reported total revenue of $523.6 million, up from $455.9 million reported for the same period of the prior fiscal year. The revenue growth potential of the company and its smart investments and acquisitions might justify Red Hat’s high valuation, so one should not necessarily run away from the stock simply because the company is experiencing intensifying insider selling activity. 41 hedge funds monitored by Insider Monkey had stakes in the company at the end of the third quarter. New York-based D.E. Shaw & Co. L.P., founded by David E. Shaw, trimmed its stake in Red Hat Inc. (NYSE:RHT) by 11% during the September quarter to approximately 983,000 shares.

Let’s head to the next pages of this daily insider trading article, which disclose the recent insider sales reported at Sinclair Broadcast Group Inc. (NASDAQ:SBGI) and Laboratory Corp. of America Holdings (NYSE:LH).

Sinclair Broadcast Group Inc. (NASDAQ:SBGI) is another company that had an insider unload shares this past week. Director Martin R. Leader offloaded 1,000 shares on Friday at a weighted average price of $30.71, and currently owns 62,794 shares. Although this sale is not overly significant, investors should take note of the high insider trading activity on the sell side witnessed in 2015. In contrast, the company has not registered any insider buying since 2012. Nonetheless, several valuation metrics suggest a more positive outlook for the diversified television broadcasting company. The stock trades at a trailing P/E of 13.83, which compares with the 21.63 ratio for the S&P 500 benchmark, and at a forward P/E ratio of only 9.36.

Despite the fact that Sinclair Broadcast posted lower net income for the nine months that ended September 30 relative to the same period a year ago, analysts anticipate substantial bottom-line growth for fiscal year 2016. Sinclair reported total net broadcast revenues of $1.46 billion for the first nine months of 2015, up from $1.23 billion reported for the same period of 2014. Therefore, it appears that Sinclair Broadcast Group is well-positioned to deliver the earnings growth analysts anticipate. A total of 31 hedgies from our database were invested in the television broadcasting company at the end of the third quarter, amassing almost 22% of its shares. Richard Barrera’s Roystone Capital Partners reported ownership of 4.26 million shares of Sinclair Broadcast Group Inc. (NASDAQ:SBGI) through its 13F for the July-to-September period.

Moving on to the last company with insider selling discussed in this article, Laboratory Corp. of America Holdings (NYSE:LH) saw one of its executives sell shares last week. F. Samuel Eberts III, Chief Legal Officer and Secretary since January 2009, discarded 1,215 shares on Friday at a price of $119.05 per share, cutting his stake to 18,066 units of common stock. The shares of the independent clinical laboratory company are trading at relatively the same level they were trading at exactly one year ago, but valuation metrics point to upside in the future. Analysts’ high earnings expectations for fiscal year 2016 yield a forward P/E ratio of 13.08.

The company reported net revenue of $6.26 billion for the nine months that ended September 30, compared with $4.50 billion reported for the same period of the prior year. That increase was achieved as a result of the acquisition of Covance Inc., which took place at the beginning of 2015, and strong organic volume growth in LCD and tuck-in acquisitions. Most importantly, Laboratory Corp. reported diluted net income per share of $4.21 for the first nine months of 2015, up from $2.69 per share reported for the same period of 2014. Andreas Halvorsen’s Viking Global acquired a 5.05 million-share stake in Laboratory Corp. of America Holdings (NYSE:LH) during the third quarter.

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