With an increase in the usage of equity-based compensation, company executives and Board members sell shares for a variety of reasons beyond just their companies’ current developments and future prospects. This means that it is extremely cumbersome to find the actual reason behind each insider sale, which makes insider selling metrics seem obsolete. Past research shows that long runs of consecutive insider purchases or sales are quite frequent, which means that insider trading behavior can be easily implemented in one’s stock analysis process. Studies show that the odds in favor of an insider purchase being followed by another purchase are three times greater than being followed by a sale. Similarly, the odds in favor of an insider sale being followed by a sale are twice greater than being followed by a purchase. As a result, insider selling can still offer some insights about how directors and executives feel about their companies’ future performance. Insider Monkey processed most Form 4 filings submitted with the SEC this Thursday and identified three companies with noteworthy spontaneous insider selling.
Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).
Energy Company’s CFO Sells Massive Block of Shares
CMS Energy Corporation (NYSE:CMS) had one of its most informed executives offload a massive block of shares earlier this week. Thomas J. Webb, Executive Vice President and Chief Financial Officer, sold 100,000 shares on Wednesday at prices that fell between $41.36 and $41.61 per share, which trimmed his overall holding to 256,163 shares.
CMS Energy is a Michigan-focused energy company that operates several subsidiaries, including Consumers, an electric and gas utility, and CMS Enterprises, an independent power producer. The shares of the energy company have advanced 24% in the past 12 months without taking a hit from the recent broader market sell-off. This low volatility stock offers great capital protection amid broader market sell-offs, but most stocks in the same “low volatility” category may seem too expensive. CMS Energy Corporation (NYSE:CMS)’s shares are currently changing hands at around 18.9-times expected earnings versus the forward P/E multiple of 16.5 for the electric utilities sector, so this energy stock isn’t overly expensive. The company recorded net income of $164 million for the first quarter of this year, down from $202 million reported for the same period of the prior year. The decrease in the bottom-line figure was mainly driven by lower electric and gas deliveries, which were due to the second-warmest winter in consumers’ history. The decrease was partly offset by the impact of electric and gas rate increases.
CMS Energy pays out a quarterly dividend of $0.31 per share, which equates to a current dividend yield of 3.01%. The number of hedge funds tracked by Insider Monkey with stakes in the Michigan-based company dropped to 10 from 18 during the December quarter. Murray Stahl’s Horizon Asset Management reported owning 31,062 shares of CMS Energy Corporation (NYSE:CMS) through the latest round of 13Fs.