All major U.S. indexes closed sharply in the red on Monday, with the Standard and Poor’s 500 Index incurring the largest one-day loss over the past four weeks. Reputable hedge fund manager Carl Icahn released a video at midnight speaking about his thoughts on several political and economic issues, including the low interest rate environment pursued by the Federal Reserve. The video clearly pinpoints some loopholes in the U.S stock markets and in the economy overall, which might imply that there is more trouble ahead. Simultaneously, a bounty of corporate executives and other insiders have been dumping their holdings lately, pointing to the seriousness of the current market sentiment. Cheniere Energy Inc. (NYSEMKT:LNG), Restoration Hardware Holdings Inc. (NYSE:RH), and Independent Bank Corporation(MI) (NASDAQ:IBCP) are three companies that have registered significant insider selling activity as of late. In the following article we will attempt to stipulate whether the insider sales at these companies might be somewhat related to their future prospects or not.
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. 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 the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 118% over the ensuing 36 months, outperforming the S&P 500 Index by nearly 61 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
Let’s start off by investigating insiders’ bearishness at Cheniere Energy Inc. (NYSEMKT:LNG). Charif Souki, Co-Founder, Chief Executive Officer, and President of Cheniere, reported selling 100,000 shares during the previous week at prices in the range of $46.25-to-$50.42, all of which were owned by a trust. It is highly likely that the decision to sell these shares was not entirely made by the Co-Founder, but the selling might still bear some information. It is also worth mentioning that Charif Souki owns an additional 3.75 million shares. The shares of the U.S liquefied natural gas exporter have lost significant ground in 2015, dropping by more than 32% year-to-date. China’s economic slowdown and the dwindling demand for gas might explain the disappointing stock performance. A little more than a week ago, Cheniere announced a freshly-signed deal to deliver 24 cargoes to Électricité de France S.A. from 2017 through 2018, which proves that the company has been quite successful in tackling the sluggish demand from China. Just recently, Carl Icahn of Icahn Enterprises LP boosted his position in Cheniere Energy Inc. (NYSEMKT:LNG) to 11.43% of the company’s shares.