The conventional wisdom is that it is impossible to really determine the reason that insiders sell their stock in a company, but we may have a bit of a special situation with Monster Beverage Corp (NASDAQ:MNST) and Trulia Inc (NYSE:TRLA). The corporate insider could need to pay college tuition, or perhaps wants to buy a condo in Vail. 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. In addition to using hedge fund filings to develop investing strategies that have beaten Mr. Market by double-digits, we also maintain a database of insider transactions to help investors decide if a company is worth a closer look. In this article, we will examine two companies with extremely heavy insider sales. Although we can only speculate as to the true motivation for the sales, investors can do more due diligence and determine whether there is a short sale opportunity, or just a large red flag to avoid a certain company’s stock.
Monster Beverage Corp (NASDAQ:MNST)
Other commentators across the web have noted the recent large insider sales at Monster Beverage Corp (NASDAQ:MNST). Monster manufactures and distributes alternative beverages, and it is most well known for its energy drinks. The Company has come under fire over the past six months, with some alleging that its energy drinks may have negative health consequences.
Heavy insider sales combined with the end of a share buyback program, as well as negative press, could bode poorly for Monster’s share price. Since the first of March, multiple insiders at Monster have sold over 1.26 million shares. In the last three months, there have been 15 insider sales, with only one insider purchase. In the last 12 months, insiders have sold 2.289 million shares, while only buying 50,600 shares.
CEO Rodney Sacks alone has sold over 573,000 shares in March, reducing his position in the Company by approximately 34%. Monster Beverage Corp (NASDAQ:MNST) currently has a share float of 141 million shares. When the officers are substantially reducing their holdings in a company, it may be a negative signal.
The Company is heavily shorted, with a short interest at the end of February of 4.89 million shares. The short float is 3.43%. The stock is very volatile, with a monthly volatility of 3.31%. This volatility highlights a significant risk of a short squeeze with the stock. Any even remotely positive news can send shorts scrambling to cover their positions, resulting in large intra-day moves up. The share price has taken a hit dropping 19.76% over the past year, and is down over 8% year to date.
This has occured despite an aggressive stock repurchase program undertaken by management. The Company recently reported that it had repurchased 6.7 million shares during Q4 of 2012 as part of its buy-back program. There were limited shares which were repurchased in the first few months of 2013, but the funds earmarked for the buy-back program have since been exhausted. Without the buyback program to shore up the share price, the stock could be in for a further drop.
It is also possible that hedge funds may be getting in on the short side. In January, the Wall Street Journal reported rumors from the “twitter-verse” that David Einhorn of Greenlight Capital had taken a short position in Monster Beverage Corp (NASDAQ:MNST); see Greenlight’s holdings here.
Monster is also showing strong revenue growth. Gross sales for Q4 of 2012 increased over 16% to $545 Million, versus $467.3 Million in the prior year quarter. Despite the revenue growth, the Company missed analysts’ latest estimates, and currently has a P/E ratio of 24.87 and an EPS of $1.95. Though there may be a short opportunity with Monster, there is significant risk as well. Investors looking for a more stable beverage company may want to look to Buffett favorite, The Coca-Cola Company (NYSE:KO); read here more about why Coke may be a good investment.
Trulia Inc (NYSE:TRLA)
Another company with recent heavy insider trading is Trulia Inc (NYSE:TRLA). Trulia is a real estate web site, providing home buyers and renters a wide variety of services. The Company went public in September of 2012.
Insiders have sold over 5.4 million shares in the past three months, and a majority of these sales were due to the expiration of the lockup period on March 19th. Thus, this is a case were insiders want to diversify in order to reduce risk. Still, the company has a share float of 19.56 million. The shares sold by insiders over the past 3 months represents 27% of the entire share float.
This is a huge increase in liquidity for the stock.
This, combined with the lack of profitability, may create an environment conducive to a drop in share price. Trulia Inc (NYSE:TRLA) itself, meanwhile, has yet to be profitable, and recently reported a fiscal Q4 loss of $1.6 million, with revenue of $20.6 million. This compared to a loss of $2.1 million, on $11.74 million in sales, in the same quarter one year earlier.
Once again, Trulia Inc (NYSE:TRLA), like Monster, is heavily shorted, with a short interest of 2.4 million shares at the end of February; such a large short interest increases the likelihood of a short sale squeeze. While it makes sense for corporate insiders to diversity their holdings at the end of any lock up period, the sheer amount of shares sold in this particular situation may be flooding the market, such that a price drop is inevitable.
Still, the share price has exploded over 90% since the company’s IPO, and it is up 86% in the last quarter alone.
In conclusion, Monster and Trulia provide examples of companies where heavy insider selling could be a signal of insiders’ decreased confidence in the future performance of their respective businesses. By performing significant due diligence, investors may be able to determine whether particular insiders are merely diversifying their risk as an intelligent economic safeguard, or whether they believe the future performance of their companies are in jeopardy. Investors interested in either of these companies should continue to monitor insider transactions, as well daily price movement.
Disclosure: none
