Past research shows that companies with high earnings multiples and insider selling tend to underperform stock market benchmarks by a wide margin. Similarly, extensive research also finds evidence that companies witnessing heavy insider selling underperform companies with insider buying. It is true that corporate insiders can sell shares for a variety of reasons, most of which may not be related to their companies’ current developments or future performance, but monitoring insider selling activity can help retail investors in avoiding bad stocks. Retail investors should bear in mind that heavy insider selling or even massive clusters of insider selling do not reveal any short-selling opportunities. Put it differently, the insider selling metric does not always indicate that a company will underperform peers or its share price will drop in the months or years ahead. Instead, investors should mostly interpret insider selling as a sign of “fair” valuation, implying that companies with strong insider selling may not enjoy the same exceptional stock performance as companies with insider buying. Insider Monkey processed dozens of Form 4 filings recently submitted with the SEC and pinpointed three companies with notable insider selling, so let’s take a brief look at the three companies in question.
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To start with, Chico’s FAS Inc. (NYSE:CHS) had one of its executives sell a large block of shares last week. Dona Noce Colaco, Brand President White House/Black Market, sold 54,988 shares on Thursday at prices that ranged from $12.55 to $13.05 per share, cutting her direct ownership to 178,745 shares. She also possesses an indirect ownership stake of 195,468 shares, which is held through a trust fund. The shares of the women’s clothing retailer have advanced 20% since the beginning of 2016, after experiencing a terrible 2015 in terms of stock performance. Thus, the recent surge in the company’s stock price might have created exit points for both insiders and investors willing to diversify their holdings.
The retailer’s portfolio of brands includes Chico’s, White House Black Market (WHBM), and Soma. Chico’s FAS Inc. (NYSE:CHS) operates slightly more than 1,500 stores in the United States, Puerto Rico, the U.S. Virgin Islands and Canada, as well as sells merchandise via 37 franchise locations in Mexico. Chico’s FAS previously operated a fourth brand, called Boston Proper, but the company completed the sale of the Boston Proper direct-to-consumer business in early 2016. The company’s net sales for fiscal 2015 that ended January 30 totaled $2.64 billion, decreasing 1.2% year-on-year. The decrease mainly reflects a 1.5% decrease in comparable sales (excluding Boston Proper and international sales) and a decline in Boston Proper sales. The company’s management anticipates flat to slightly negative growth in comparable sales for fiscal 2016, with higher odds of positive growth in the second half of the year. It should also be noted that the Boston Proper sale is expected to drive up fiscal 2016 operating margin by roughly 100 basis points and earnings per share by around $0.09. A number of 22 hedge funds tracked by Insider Monkey were invested in Chico’s FAS at the end of December, which aggregately stockpiled nearly 15% of the company’s shares. Jim Simons’ Renaissance Technologies increased its exposure to Chico’s FAS Inc. (NYSE:CHS) by 22% during the December quarter, ending 2015 with 4.79 million shares.