Top-Tier Insiders at Philip Morris International Inc. (PM) and Two Other Companies Are Jettisoning Shares

Does it make sense to track insider selling activity? It depends! (One of the most commonly used answers in economics). The increased usage of stock-based equity compensation has indeed distorted insider trading data, which makes it particularly cumbersome to accurately interpret insider selling. Truth be told, directors and executives can sell shares for numerous reasons unrelated to their companies’ current developments or future prospects, and it’s nearly impossible to find out what stands behind each insider sale. However, clusters of insider selling may serve as a possible forward-looking indicator that certain companies’ shares do not have much room to run. Put it differently, heavy insider selling can be interpreted as a sign that companies are approaching or even exceeding their “true” market value. Having this in mind, the following article will discuss fresh insider selling witnessed at three companies, as well as briefly review the performance of those companies.

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 imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).

Tobacco Giant PMI Had Chairman Sell Shares This Week

Philip Morris International Inc. (NYSE:PM) had one of its top-tier insiders sell a sizable block of shares earlier this week. Chairman of the Board, Louis C. Camilleri, discarded 33,340 shares on Monday at prices varying from $96.93 to $97.03 per share, trimming his overall holding to 800,157 shares. Mr. Camilleri sold an additional 80,000 shares in early February at a weighted average price of $88.20.

The shares of the tobacco giant have gained 10% since the beginning of 2016 and are up 17% in the past 12 months. The company’s total shipment volume for cigarettes and other tobacco products (OTP) continued to decline in the first quarter of this year, dropping 1.4% year-on-year. However, PMI’s cigarette shipment volume of its most popular brands such as Marlboro, L&M and Parliament increased year-on-year during the quarter. Philip Morris International Inc. (NYSE:PM) manufactures and markets cigarettes and other tobacco products in markets outside the United States, so the strong U.S. dollar has put significant weight on the company’s financials in the past several quarters. However, with the green buck depreciating against major global currencies thus far in 2016, PMI recently increased its full-year 2016 EPS guidance to the range of $4.40-to-$4.50 from the previous guidance of $4.25-to-$4.35 per share.

PMI boasts an attractive dividend yield of 4.20%, significantly above the yields offered by other industry peers. However, the dividend payout ratio for the first quarter reached almost 99%, which does look too promising for income-seeking investors. Assuming that PMI’s EPS for 2016 reaches the lower end of the aforementioned range, the payout would equal approximately 93%. The stock is priced at 20.0-times expected earnings, faintly below the forward P/E ratio of 20.5 for the Tobacco industry. Ray Carroll’s Breton Hill Capital reported owning 67,797 shares of Philip Morris International Inc. (NYSE:PM) through its 13F for the March quarter.

Let’s head to the next two pages of this article, which discuss the insider selling at Medidata Solutions Inc. (NASDAQ:MDSO) and Mellanox Technologies Ltd. (NASDAQ:MLNX).

Medidata Solutions Witnessed Increased Insider Selling This Week

Medidata Solutions Inc. (NASDAQ:MDSO) had four different executives sell shares this week, with three of them conducting transactions under pre-arranged trading plans. Eileen M. Schloss, Executive Vice President of Human Resources, sold 68,717 shares on Monday on the open market this Monday at prices that fell between $46.50 and $47.01 per share, which cut her ownership stake to 22,361 shares.

The provider of a platform of cloud-based solutions for life sciences has seen its market value decline nearly 8% since the beginning of 2016. The company’s top-line results have been on an uptrend in the past several years, with total revenues increasing to $392.51 million in 2015 from $335.07 million in 2014, $276.85 million in 2013, and $218.35 million in 2012. Medidata experienced strong growth in subscription revenues, which accounted for 86% of total revenues last year, in 2015 and 2014 due to increased sales to existing large and mid-market customers, both from renewals and adoption of additional solutions offered by its technology platform (e.g. offerings for coding, randomization, trial supply management, among others). Medidata recently reported first-quarter total revenues of $104.24 million, so the company is on track to achieve its 2016 revenues guidance of $450.0 million-to-$474.0 million.

The shares of Medidata are currently changing hands at around 36.4-times expected earnings, significantly above the forward P/E multiple of 18.8 for the Nasdaq 100 Index. The number of hedge funds tracked by Insider Monkey with long positions in Medidata dropped to 13 from 17 during the December quarter. ShearLink Capital, headed by former Viking Global trader Vivek Mehta, owned 464,446 shares of Medidata Solutions Inc. (NASDAQ:MDSO) at the end of December.

Mellanox Technologies Also Had Chairman Unload Some Shares

Let’s wrap up our discussion by examining the insider selling registered at Mellanox Technologies Ltd. (NASDAQ:MLNX). Non-Executive Chairman Irwin Federman offloaded 25,000 ordinary shares on Tuesday at a price of $45.54 per share, after which Mr. Federman continues to own a stake of 31,133 shares. The stake also includes 375 unvested restricted share units (RSUs).

The high-speed server interconnect chip vendor has seen its shares plummet after providing weaker-than-expected revenue guidance for the second quarter despite beating analysts’ bottom- and top-line estimates for the first quarter. Mellanox shares are 7% in the green year-to-date despite having lost 15% in the past month alone. The company anticipates second-quarter revenue in the range of $210 million-to-$215 million, below analysts’ average estimate of $216.8 million. Earlier this year, Mellanox completed the $811 million-acquisition of network-processing semiconductors company EZchip Semiconductor (EZCH) announced in September 2015. The EZchip acquisition, which was funded with cash on hand and $280 million of debt, is set to assist Mellanox in becoming the leading broad-line supplier of intelligent interconnect solutions for the software-defined data centers. Soon after the completion of the deal, analysts at Barclays reinitiated coverage on Mellanox with an ‘Overweight’ rating and a price target of $58, saying that “EZCH will accelerate MLNX’s intelligence offerings in its current product line-up”.

Mellanox Technologies boasts a forward P/E multiple of 10.9, which below the ratio of 14.2 for the Semiconductors industry. There were 30 money managers from our system with stakes in Mellanox at the end of 2016, who amassed approximately 17% of the company’s shares. Jim Simons’ Renaissance Technologies was the holder of 935,583 shares of Mellanox Technologies Ltd. (NASDAQ:MLNX) on December 31.

Disclosure: None