Insiders Are Running Away From Adobe Systems Incorporated (ADBE) and Two Finance-Related Companies (REIT and Investment Management Firm)

Avoiding “loser” stocks is of equal importance for investors as it is finding high-potential equity investments. Investors usually employ a wide range strategies to identify potential winners depending on their risk aversion and underlying purpose, so we are not going to provide any tips on how to find possible winners. Instead, we will discuss a group of stocks to avoid: stocks with heavy insider selling. Of course, corporate insiders may cash out portions of their holdings for numerous reasons, so one should not interpret each insider sale as a negative sign. However, clusters of insider selling, which involve three or more insiders, can raise red flags on some occasions. If highly-informed individuals running a company are selling shares, it does not make sense for individual investors to turn bullish on the company. Past research shows that companies with heavy insider selling tend to underperform companies witnessing insider buying, so it does make sense to examine insider selling (though investors should be very careful when analyzing this piece of information). Insider Monkey processed a high number of Form 4 filings submitted with the SEC on Tuesday and Wednesday, and pinpointed three companies with noteworthy insider selling.

Through extensive research, we have determined that the due diligence that the investors in our database employ, as well as their long-term focus makes them perfect targets to emulate. However, the results of our analysis have also shown that the small-cap picks of these funds can generate much better returns, with the 15 most popular small-cap stocks beating the market by an average of 95 basis points per month (read more details here).

T. Rowe Price Group Inc. (NASDAQ:TROW) has seen three insiders sell shares since the beginning of 2016, so let’s take a look at the most recent activity. Vice President James A.C. Kennedy, who stepped down from his role as President, Chief Executive Officer and Chairman of the Baltimore investment management firm in 2015, sold 38,992 shares on Monday at prices varying from $73.40 to $73.49 per share, all of which were held by the 2008 Kennedy Family Trust. After the recent sale, the trust fund continues to hold a stake of 838,262 shares. Mr. Kennedy also holds a direct ownership stake of 1.34 million shares, as well as an indirect ownership stake of 445,545 shares held through James A.C. Kennedy LLC.

T. Rowe Price Group Inc. (NASDAQ:TROW) is a financial services holding company that focuses on providing global investment management services to individual and institutional investors in T. Rowe Price mutual funds and other investment portfolios. The company’s net revenues for 2015 totaled $4.20 billion, which increased from $3.98 billion generated in 2014. Investment advisory revenues derived from the T. Rowe Price mutual funds increased $182.1 million or 7.3% year-on-year to approximately $2.7 billion due to higher average mutual fund assets. The company’s 2015 average mutual fund assets increased 7.1% year-on-year to $493.6 billion. Meanwhile, investment advisory revenues earned on other investment portfolios were $1.0 billion, which increased $40.7 million or 4.2% year-on-year. It should be mentioned that T. Rowe Price is a major shareholder of Valeant Pharmaceuticals Intl Inc. (NYSE:VRX), with its mutual funds holding the third-largest stake in the battered company. Therefore, the investment management firm’s mutual funds seem to have lost a great deal of money from their exposure to Valeant. Shares of T. Rowe Price Group are up by 2% since the beginning of the year and trade around 14.8-times expected earnings, versus the forward P/E multiple of 13.0 for the Financials sector. A total of 28 hedge funds from our database had exposure to T. Rowe Price at the end of December 2015. Ken Griffin’s Citadel Advisors had nearly 814,000 shares of T. Rowe Price Group Inc. (NASDAQ:TROW) in its equity portfolio at the end of 2015.

The next two pages of this article discuss the insider selling registered at Adobe Systems Incorporated (NASDAQ:ADBE) and Simon Property Group Inc. (NYSE:SPG).

The insider selling activity at Adobe Systems Incorporated (NASDAQ:ADBE) has been extremely high in the past several months, though some insider sales were connected with newly-exercised stock options. Donna Morris, Senior Vice President of Customer and Employee Experience, sold 25,000 shares on Tuesday at $93 apiece, all of which were held by the Morris Family Rev Trust. Following the recent sale, the trust fund continues to own 74,008 shares. Moreover, John E. Warnock, co-founder of Adobe Systems and Co-Chairman of the company’s Board, discarded 9,000 units of common stock on Monday at prices ranging from $92.69 to $92.72 per share, which were held by the Warnock Family Trust that currently owns 587,703 shares. The Co-Chairman also holds a direct ownership stake of 22,868 shares.

The shares of the software giant have enjoyed a great run in the past several years, as they have gained 169% in the past five years. The stock has advanced 26% in the past year, despite having experienced a sharp pullback from early 2016 through mid-February. Adobe Systems Incorporated is a developer and marketer of software tools for creating, managing, measuring and optimizing digital design content that used to be sold physical copies for set fees. However, the highly-diversified software company has successfully adopted the transition to a subscription-based model in recent years, a cloud computing transition that has paid off handsomely for both shareholders and the company itself. The company’s subscription revenue as a share of total revenue increased to 67% from 50% during fiscal 2015 that ended November 27, thanks to the successful transition to a subscription-based model. Just recently, the company reported its financial results for the first quarter of fiscal year 2016 that ended March 4, posting record Digital Media segment revenue of $932 million, which grew 33% year-on-year. Adobe’s Creative revenue, which includes the company’s Creative Cloud and perpetual creative offerings, increased 44% year-on-year to a record $733 million. Meanwhile, the stock is priced at 24.9-times expected earnings, below the forward P/E ratio of 36.2 for the Application Software sector. The hedge fund sentiment towards Adobe Systems increased in the fourth quarter of 2015, with the number of funds bullish on the company climbing to 46 from 42 quarter-on-quarter. Stephen Mandel’s Lone Pine Capital reported ownership of 4.01 million shares in Adobe Systems Incorporated (NASDAQ:ADBE) in its 13F filing for the December quarter.

Simon Property Group Inc. (NYSE:SPG) also had one of its executives unload some shares at the beginning of this week. David J. Contis, Senior Executive Vice President, President of Simon Malls, offloaded 11,000 shares on Monday at a price of $202.63 per share, trimming his overall holding to 15,163 shares.

Simon Property Group is a real estate investment trust (REIT) that owns and has interests in 209 income-producing properties across the United States, which include 108 malls, 71 Premium Outlets, 14 Mills, 4 lifestyle centers, and 12 other retail properties. The REIT’s total consolidated revenue for 2015 totaled $5.27 billion, which increased from $4.87 billion in 2014 and $4.54 billion in 2013. Standard & Poor’s is set to add a new real estate sector to its Global Industry Classification Standard (GICS) structure in September, which might have a beneficial impact on REITs in general. It is believed that REITs will experience increased demand following this move, as U.S. equity funds would have to invest approximately $100 billion in this sector to reach a market-neutral position. Moreover, analysts anticipate that REITs will experience less volatility given that this camp of stocks will be separated from the highly-volatile financials sector. Simon Property Group currently pays out an annualized dividend of $6.40 per share, which equates to a current dividend yield of 3.18%. The REIT has seen its shares advance close to 4% since the beginning of the year. There were 31 hedge funds from our database invested in the REIT on December 31, accumulating almost 2% of its total number of outstanding shares. Cliff Asness’ AQR Capital Management holds a number of 500,439 shares in Simon Property Group Inc. (NYSE:SPG) as of the end of the October-to-December period.

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