Insider selling activity has been losing steam in the past several weeks, and so has the terrific run in U.S. equities that started in early 2009. All major U.S. indexes closed in the green on the last full trading day before Christmas, thanks to the surge in energy shares. In fact, the S&P 500 energy sector gained 4.2% on Wednesday, as U.S. crude oil prices surged 3.8% on fresh data about crude-oil inventories. In the meantime, some companies’ insiders have been cashing out their holdings ahead of the holiday-shortened trading session on Thursday, which could theoretically point to grim prospects at those companies. Although corporate insiders can sell shares for a variety of reasons unconnected to their companies’ current challenges or grim prospects, heavy insider selling is still seen as a warning signal by investors. The Insider Monkey team identified noteworthy insider sales at three companies, so this article will display those trades and briefly discuss the performance of the three 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. Our research has shown that hedge funds’ large-cap stock picks historically underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning over 102% and beating the market by more than 53 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise (while avoiding their high fees at the same time) rather than large-cap stocks.
Let’s begin our investigation by looking into the insider selling reported at Red Hat Inc. (NYSE:RHT). Arun Oberoi, Executive Vice President of Global Sales and Services, offloaded 9,300 shares on Tuesday at prices that ranged from $80.79 to $80.81 per share, trimming his holding to 52,616 shares. The provider of open source software solutions has seen its shares advance by nearly 19% this year and most financial hubs believe that the stock can go even higher in the forthcoming future. Open source software (the code behind the software is available for modification) has been increasingly popular in the past several years, and represents an alternative to proprietary software. It appears that Red Hat Inc. (NYSE:RHT) has a great growth potential in the future, considering that different communities of developers that are not employed by Red Hat assist the company in developing and creating new open source offerings. The company primarily sells its offerings through annual or multi-year subscriptions, while the revenue is recognized over the agreed period with its customers. Red Hat reported total revenue of $524 million for the third quarter of fiscal 2016, ended November 30, up by 15% year-over-year (up by 21% in constant currency). Its non-GAAP net income increased to $89 million or $0.48 per diluted share from $79 million or $0.42 per share reported last year. A total of 41 hedge funds from our database were invested in the company at the end of the third quarter. Brett Brakett’s Tremblant Capital cut its position in Red Hat Inc. (NYSE:RHT) by 15% during the September quarter to 759,826 shares.
Cheniere Energy Inc. (NYSEMKT:LNG) has also witnessed strong insider trading activity on the sell side recently. Vicky A. Bailey, Director, Chairman of the Governance and Nominating Committee and a member of the Audit Committee, offloaded 15,997 shares on Monday at a weighted average price of $35.92. Following the sizable sell-off, the Director holds a stake of 43,226 shares. Earlier this month, Cheniere’s Board of Directors terminated the employment of Charif Souki as the CEO and President of the company, and appointed Neal A. Shear as interim CEO and President instead. Numerous sources suggest that Charif Souki was fired because of his aggressive expansion plans. The sustained glut in the LNG market does not spur optimism, so it is quite clear why an aggressive expansion strategy was not applauded by the Board that also includes two members appointed by activist investor Carl Icahn. The Houston-based energy company that engages in LNG-related businesses has seen its stock decline 44% since the beginning of the year, but it skyrocketed by more than 8% on Wednesday. The number of smart money investors from our database with positions in the company declined to 62 from 76 during the third quarter, amassing a whopping 62.30% of its outstanding common stock. Icahn Enterprises owned28.55 million shares of Cheniere Energy Inc. (NYSEMKT:LNG) at the end of September, but the activist fund has been gradually boosting up its stake in the company since the end of the latest quarter and has last reported holding some 30.82 million shares.
Equity Residential (NYSE:EQR) has registered a high volume of insider selling activity over the past week or so, but most insider sales were conducted in connection to the exercise of stock options. Director John W. Alexander reported selling 16,491 shares on Tuesday at $80.08 apiece, all of which were owned through the Equity Residential Supplemental Executive Retirement Plan (SERP). After the recent sell-off, his SERP account holds a stake of 15,023 shares. The Director also holds a direct ownership stake of 73,041 shares. The shares of this real estate investment trust that focuses on the acquisition and management of high-quality apartment properties are up 12% this year. The company aims at finding the right mix of occupancy and rental rates that maximize its revenues, and it seems that its management has been successful in pursuing this goal. Equity Residential reported revenues of nearly $1.92 billion for the first nine months of this year, as compared with $1.82 billion reported for the same period a year ago. This increase was mainly attributable to higher average rental rates and higher occupancy. Its diluted earnings per share for the nine-month period that ended September 30 came to $1.80, up from $1.13 reported a year ago. Jeffrey Furber’s AEW Capital Management trimmed its stake in Equity Residential (NYSE:EQR) by 8% during the July-to-September period to 3.91 million shares.