Is The Broader Market Correction Forcing These Companies’ Insiders To Sell Shares?

Generally, insider buying is considered far more telling than insider selling, as insiders tend to sell stock for numerous reasons unrelated to their companies’ prospects. Nevertheless, recent data suggests that the ratio of insider selling over insider buying activity increased significantly during the previous week, pointing to the fact that most of this activity might have been triggered by the high volatility in the U.S stock market, coupled with company-specific issues. Hence, insider selling may be as valuable as insider buying activity in some instances, considering that it might help an average investor avoid short- to medium-term downtrends. The Insider Monkey team pinpointed three companies with heavy insider selling activity over the past few weeks. The companies in question are represented by: Avago Technologies Ltd (NASDAQ:AVGO), Fidelity National Financial Inc. (NYSE:FNF), and ClearBridge Energy MLP Fund Inc. (NYSE:CEM). We will attempt to reveal the potential reasons behind insiders’ bearishness and see whether this activity might point to gloomy prospects at these companies in the future.

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.

To start with, Avago Technologies Ltd (NASDAQ:AVGO) saw five corporate insiders sell shares during September. Director Justine F. Lien reported selling 3,285 shares at a price of $125.96 per share last Friday. Following the recent sale, the Director currently holds 3,304 shares, 1,563 of which represent restricted share units. It is also worth pointing out that the remaining insiders unloaded shares after exercising stock options, so their sales do not bear as much weight. The shares of Avago have delivered a great performance this year, returning nearly 19% since the beginning of the year. It seems that the semiconductor device supplier might benefit significantly from Apple Inc. (NASDAQ:AAPL)’s record opening weekend iPhone sales, given that the chipmaker is supplying its Avago AFEM-8030 Power Amplifier Module to the tech giant. At the same time, the company delivered a strong financial performance for its third quarter of fiscal 2015 that ended August 2, reporting revenue growth of 7% year-over-year to $1.74 billion. Hence, it is hard to stipulate the exact reason why the director reduced her stake, but the recent financial turmoil remains an option to consider. In the meantime, Andreas Halvorsen’s Viking Global added a 4.77 million-share position in Avago Technologies Ltd (NASDAQ:AVGO) to its portfolio during the June quarter.

Let’s now move on to Fidelity National Financial Inc. (NYSE:FNF), one of the largest providers of title insurance, technology and transaction services to the real estate and mortgage industries in the United States. Director Richard N. Massey offloaded 9,038 of FNFV Group’s common stock last week at a weighted average price of $13.427, trimming his stake to 9,452 shares of Fidelity National Financial’s holding company. Massey also maintains 152,675 shares of FNF. Fidelity National Financial is divided into two groups, FNF Core Operations and FNF Ventures (FNFV). The latter one holds majority and minority equity investment stakes in a number of entities, including American Blue Ribbon Holdings LLC and J. Alexander’s Holdings LLC, so FNFV represents a tracking stock that was established to highlight the value of the portfolio companies of FNF. Meanwhile, the FNF shares are nearly 1% in the green year-to-date despite suffering two major slumps over the past two months or so. Daniel S. Och’s OZ Management is among the largest shareholders of Fidelity National Financial Inc. (NYSE:FNF) within our database, holding 9.70 million shares as of June 30.

Last but not least, ClearBridge Energy MLP Fund Inc. (NYSE:CEM) had one of its Directors sell shares on Friday. William R. Hutchinson sold 6,000 shares at prices in the range of $19.19 to $20.03, while 2,501 of these shares were held for the benefit of Mr. Hutchinson’s wife. Following the recent transaction, the Director no longer owns shares of ClearBridge. It is also worth mentioning that Carol L. Colman, another Director of ClearBridge, unloaded 2,000 shares for $20.06 each earlier this month, trimming her stake to 1,120 shares. Even though ClearBridge Energy MLP Fund primarily focuses on energy-related master limited partnerships with stable cash flow streams and low exposure to commodities, it appears that the low-price commodity environment has put downward pressure on the stock. The shares of ClearBridge have lost almost 40% since the beginning of the year and 23% over the past month. Therefore, it might be the case that the two Directors decided to cash out some or all of their stakes fearing more downside in the months ahead.

Disclosure: None