Why Are Influential Insiders Selling Shares of These Companies?

Insider trading policies allow directors and senior officers to buy and sell shares during specific trading windows, primarily because these insiders may have access to material non-public information on a daily basis. Moreover, these windows tend to open after companies disclose their quarterly financial results and close before the end of each fiscal quarter. The existence of these trading windows might explain the exploding insider selling that has been observed so far this week, as nearly half of S&P 500 companies have already released their quarterly reports. It might also be the case that insiders have impatiently awaited the opening of trading windows to discard portions of their holdings amid increased volatility and concerns about the short- and medium-term direction of U.S. equities. The Insider Monkey team identified three companies with noteworthy insider sales this week, so let’s proceed with the discussion of those trades.

Prior to discussing the insider trading activity, let’s make you familiar with what Insider Monkey does. At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period, hedge funds’ top small-cap stocks beat the S&P 500 index by double digits annually (read the details here).

Time Warner Cable Inc. (NYSE:TWC) was among the companies that witnessed insiders sell stock this week. Director Wayne H. Pace offloaded 3,792 shares on Tuesday at $184.45 apiece, trimming his overall holding to 25,309 shares. Wayne Pace also served as the Chief Financial Officer and Executive Vice President of Time Warner from 2001 to 2017, so he clearly knows more about this company than any analyst or investor.

It is already widely-known that TWC and Charter Communications Inc. (NASDAQ:CHTR) sealed a merger agreement in May 2015, under which the two companies are set to become subsidiaries under a new public parent company. Under the terms of the deal, each shareholder of TWC will receive $100 in cash and 0.5409 of Class A shares of the new company or $115 in cash and 0.4562 of Class A shares. Regulators continue to review Charter’s acquisition plan, so it is not entirely clear when the deal will be approved or if it will be approved at all. However, some analysts believe that the odds that the aforementioned deal will not go through are diminishing, with a TV analyst recently assigning a 90% probability that the deal will be approved.

The shares of Time Warner Cable Inc. (NYSE:TWC), one of the largest providers of video, data and voice services in the nation, have advanced 25% over the past 12 months. It would be foolish to pick out a particular reason why the Director decided to sell shares, as there are no clear factors that might put significant weight on the company’s stock performance in the forthcoming future. A total of 107 hedge funds tracked by Insider Monkey were invested in TWC at the end of the third quarter, amassing almost 32% of the company’s outstanding common stock. Billionaire John Paulson of Paulson & Co was an owner of 8.12 million shares of Time Warner Cable Inc. (NYSE:TWC) at the end of September.

Let’s head to the next pages of this insider trading article, where we examine the insider sales registered at Simulations Plus Inc. (NASDAQ:SLP) and McKesson Corporation (NYSE:MCK) are examined.

Simulations Plus Inc. (NASDAQ:SLP) is a company that had not registered any insider purchases or sales since early 2011 until last week, so the recent insider selling at the company is definitely worth examining. Chief Executive Officer Walter S. Woltosz reported selling 58,181 shares on Friday and Monday at prices that ranged from $11.25 to $11.31 per share and currently owns 5.90 million shares.

The developer of drug discovery and development simulation, and modeling software has seen its shares advance by more than 71% over the past 12 months. In addition, the stock has gained more than 227% over the past five years, so it is not totally surprising that the CEO offloaded a portion of his stake in the past several days. The company currently provides seven software products for pharmaceutical research and development, but it has already started to expand its focus on the defense and health care outside the pharmaceutical industry. Simulations Plus reported net revenues of $4.84 million for the first fiscal quarter of 2016, up 18.4% year-on-year. Although the company has an extremely expensive forward P/E multiple of 31.71, the freshly-revealed plans of expanding its strategic focus can surely justify the current valuation. It is also worth mentioning that Simulations Plus’s business strategy focuses on promoting growth both organically and through acquisitions, so there might be more room to run for the company in the years ahead.

A mere four hedge funds monitored by Insider Monkey had stakes in the company at the end of the third quarter. Jeffrey Bronchick’s Cove Street Capital owns 150,000 shares of Simulations Plus Inc. (NASDAQ:SLP) as of the end of the third quarter.

Moving on to McKesson Corporation (NYSE:MCK), where Lori A. Schechter, Executive Vice President, General Counsel, and Chief Compliance Officer, reported selling 2,476 shares on Monday at a price of $159.73 per share. After the recent sale, the executive continues to own 5,548 units of common stock. Even though this sale is not excessively significant, the timing of the sale might serve as reason for concern for some investors. The stock of the healthcare services and information technology company is down by 26% over the past 52 weeks, after having dropped 21% in 2016 alone. It is highly unlikely that the insider sold shares without fearing even more downside, but it is still impossible to stipulate the reasoning behind the sale.

McKesson reported revenues of $144.21 billion for the nine months ended December 31, as compared to $134.12 billion reported for the same period of the previous year. Similarly, the company’s net income increased to $1.87 billion from $1.40 billion reported for the nine-month period that ended December 31, 2014. However, McKesson’s valuation metrics suggest that the company is relatively undervalued as compared to the broader market. For instance, the stock trades at a forward P/E multiple of 11.35, which compares with the forward P/E ratio of 16.3 for the drug retail industry. The smart money sentiment towards the stock was very positive in the third quarter, as the number of hedge funds with positions in the company climbed to 68 from 62 quarter-on-quarter. Andreas Halvorsen’s Viking Global was very bullish on McKesson Corporation (NYSE:MCK) during the third quarter of 2015, and owned 2.27 million shares of the company at the end of September.

Disclosure: None