There are studies showing that companies with heavy insider selling tend to generate lower stock returns over the following 12 months than companies witnessing insider buying. Similarly, there is evidence showing that the link between insider trading behavior and stock performance is more evident at smaller companies, which also means that there is a greater chance that outside investors can generate abnormal returns by mimicking insiders’ moves at smaller companies rather than at companies with larger market caps. Considering that insider selling is perceived as a sign of weak future stock performance, monitoring this type of insider trading activity can serve as an important tool in one’s stock analysis process. The Insider Monkey team identified three companies with notable insider sales last week, so this article will thoroughly discuss those trades.
Prior to discussing the insider trading activity, let’s make you familiar with what Insider Monkey does besides monitoring insider trading behavior. At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).
NVR Inc. (NYSE:NVR) had two corporate insiders sell shares this past week. To start with, Chief Financial Officer Daniel David Malzahn offloaded 500 shares on Friday at a price of $1,637.96 per share, trimming his overall stake to 2,725 shares. Director Melquiades R. Martinez discarded 375 shares on the same day for $1,638.59 each and currently owns 181 units of common stock. The shares of the homebuilder have advanced by 29% over the past 12 months and by 107% over the past five-year period, which makes it quite clear why NVR’s insiders feel comfortable unloading shares. But did they offload shares at the right time? NVR Inc. (NYSE:NVR)’s price-to-earnings multiples suggest that the company is still quite undervalued relative to the broader market at the moment. For instance, NVR has a forward P/E multiple of 12.57, which is well below the average of 15.89 for the companies included in the S&P 500 benchmark.
NVR primarily focuses on building and selling single-family detached homes, townhomes and condominium buildings, so its financial performance is highly dependent on the demand for new homes. Although the demand for new homes improved last year, the prices of these homes were under pressure from the increase in the number of new home communities in numerous markets. Despite that, NVR posted consolidated revenue of $5.16 billion for 2015, up from $4.44 billion reported for 2014. In a similar manner, the company’s net income grew by 36% year-over-year to $382.93 million. A total of 21 hedge funds from our system were invested in the homebuilding company at the end of the third quarter, and had accumulated almost 13% of its outstanding common stock. Pennant Capital Management, founded by Alan Fournier, owns 161,737 shares of NVR Inc. (NYSE:NVR) as of September 30.
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Let’s move on to the next page of this article, which reveals the insider sales registered at Murphy Oil Corporation (NYSE:MUR) and Neogen Corporation (NASDAQ:NEOG).