Insider Selling That Might Suggest More Trouble Ahead

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Albert Edwards, a Global Strategist at Societe Generale, has warned that the next US recession is likely to hit sooner than most market participants anticipate. According to a report cited by many sources, he also reckoned that the Federal Reserve would need to lower interest rates below zero in order to tackle a potential financial meltdown. However, that seems quite extreme considering that the US economy has been gaining steam over the last few years. Even so, the Chicago Board Options Exchange Volatility Index, or the so-called VIX, has closed atop the 20 level for 24 consecutive trading days. Having that in mind, there is quite some uncertainty and turbulence in the stock markets at the moment, indeed. In the meantime, some companies’ corporate executives have started to jettison their holdings recently, which might be a result of the recent volatility and high uncertainty. In the following article we will investigate the insider selling activity at Telephone & Data Systems Inc. (NYSE:TDS), Questar Corporation (NYSE:STR), and Target Corporation (NYSE:TGT). It is highly probable that the insider selling activity at these companies is not unrelated to their prospects, that’s why we will attempt to stipulate the reasoning behind each sale.

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 more 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.

We will start off by examining the insider trading activity at Telephone & Data Systems Inc. (NYSE:TDS), a telecommunications company that has seen its stock advance by more than 3% since the beginning of the year. Director Mitchell H. Saranow reported selling 4,000 shares at a price of $25.97 per uit earlier this week, trimming his holding to 10,521 shares. The company’s main businesses got stronger over the last few months, with its U.S. Cellular business benefiting from an increasing customer base and its TDS Telecom business seeing higher residential revenue per customer. Even so, the shares of the telecom company have embarked on a more or less steady downtrend since mid-August, so it might be the case that the director fears a continuation of the decline. Mario Gabelli’s GAMCO Investors is the largest equity holder of Telephone & Data Systems Inc. (NYSE:TDS) among the hedge funds tracked by us, owning 4.43 million shares.

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