There are a number of ways for investors to screen stocks and find potential investment opportunities. A few of the ways this website focuses on are by tracking hedge fund holdings and insider trading interest. Our studies have shown that those who follow the picks of the top hedge fund managers can beat their index-focused peers by a substantial margin; discover the secrets of this strategy.
With regard to insider sales, the conventional wisdom is that it is impossible to really determine the reason that insiders sell their stock in a company. The corporate insider could need to meet some unexpected obligations, such as taxes. Generally, insiders face a strong incentive to diversify their wealth away from the company in which they hold stock or options in order to reduce their risk.
However, when insider selling is undertaken by multiple insiders who are liquidating large amounts of stock, investors should take note. Several academic studies have concluded that tracking insider transactions may be potentially profitable; learn more here.
In this article, we will examine two companies with recent large insider sales. We can only guess at the reason for the sales, and investors can do more due diligence to determine whether there is a short sale opportunity, perhaps a large red flag to avoid a certain company’s stock, or even an opportunity to go long despite the exit of insiders.
Hertz Global Holdings, Inc. (NYSE:HTZ)
Hertz Global Holdings, Inc. (NYSE:HTZ) is a global car and equipment rental company. In the last three months, there have been 58 insider trades of the company’s stock. Fifty-five of those trades were sales, with only 3 being purchases. The net amount of Hertz Global Holdings, Inc. (NYSE:HTZ) stock sold by insiders during that period is over 51 million shares. The stock has an average daily trading volume of 8.18 million.
In the last 12 months, there have been sales by insiders of over 118 million shares. A trio of private equity firms, including the Carlyle Group LP (NASDAQ:CG), Clayton, Dubilier & Rice, and Bank of America Corp (NYSE:BAC)‘s Merrill Lynch unit bought Hertz Global Holdings, Inc. (NYSE:HTZ) from Ford eight years ago. Hertz recently announced that these firms were selling their remaining stake in the company to Goldman Sachs Group, Inc. (NYSE:GS) in a deal valued at approximately $1.24 billion. Goldman Sachs Group, Inc. (NYSE:GS) will offer the shares to investors on the open market. As such, much of the insider selling is fueled by the private equity firms exiting their positions.
The private equity firms took Hertz Global Holdings, Inc. (NYSE:HTZ) public in 2006, where it debuted at an IPO price of $15. The stock is currently trading at $24.84, but only after hitting a low of $1.55 in late 2007. Many investors are betting on a downturn in Hertz, with a current short interest of 34.9 million shares, representing a high short float of 9.35% and a short ratio of 4.3. However, the shares have performed extremely well, up 51% YTD. The share price seems to be hitting near term resistance around $25. The price needs to break through this level on strong volume in order to head higher. A failure to break through this level combined with the increased liquidity of stock in the market due to the insider sales could be a bearish indicator.
CBS Corporation (NYSE:CBS)
CBS Corporation (NYSE:CBS) is a global media company that operates in five main segments: entertainment, cable networks, publishing, local broadcasting and billboards. There have been multiple unique insider sales of CBS Corporation (NYSE:CBS) stock within the last three months, with 58 sales and one large open market purchase of 1 million shares. The net activity of these transactions is 3.3 million shares sold. The Company recently announced strong first quarter results, with revenue of $4.04 billion, an increase of 6% from the prior year period. The Company reported that it had repurchased 24.1 million shares of the stock during the first quarter. The share price has performed strongly as of late and is up 26% YTD.
Thus, despite the insider sales, the additional liquidity may have been absorbed by the Company as part of the buybacks. There is more limited short interest in CBS Corporation (NYSE:CBS) versus Hertz, with 13.3 millions shares short as of the end of April, representing a short float of 2.34%. The Company has a small dividend yield of .96%.
Final thoughts
Investors should continue to monitor insider sales of CBS Corporation (NYSE:CBS) and Hertz. At this point, it appears that Hertz is performing well, but may be more likely short candidate than CBS. By performing significant due diligence, investors may be able to determine whether the insiders are merely diversifying their risk with these sales, or whether there may be a short opportunity; continue learning about how to benefit from insider trading here.
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