PowerTrend Brief: Insider Selling is a Telling Sign Ahead of Earnings

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.

As we close out the second quarter of 2012 and get ready for the earnings onslaught that will begin soon after the July 4 holiday weekend, both professional and individual investors are looking for direction, especially following the dismal second quarter. I can safely say the recently completed quarter was a dismal one, for it was filled with economic data that pointed to slowing global growth in the United States and Asia, signaling a recession in Europe, and had a number of high-profile companies either reporting earnings shortfalls or cutting their business outlook. Those companies included the likes of Proctor & Gamble Company, Best Buy Co., O’Reilly Automotive Inc., AK Steel Holding Corp., FedEx Corp., Family Dollar Stores, Inc., Nike Inc., and others

This confluence of factors has some investors sweating it out when it comes to 2Q 2012 earnings. While anxiety is one response, another is to sharpen our pencils, double check our investment theses and revisit potential buy-in points for new investment, as well as enable us to build out our holdings while reducing our overall cost basis. That is exactly what subscribers of PowerTrend Profits and I will be doing in the coming days. As Whitney M. Young, Jr. once said, “It is better to be prepared for an opportunity and not have one than to have an opportunity and not be prepared.”

One leading indicator that I generally watch but have been monitoring more closely of late is insider activity, which refers to the buying and selling activities of stocks and securities by company insiders, such as key executives and board members. Generally speaking, I’ll watch open market buying and selling that is reported to the U.S. Securities and Exchange Commission (SEC) on Form-4, which lists the name of the insider, the insider’s relationship to the company, how many shares were traded, and at what price. The form also gives the dates of an insider’s trades, total holdings of the insider after the transactions, and indicates if the trades were open market, related to the exercise of stock options, or involved some other special reason. Another advantage of Form-4 is that it must be filed with the SEC within two business days, which makes it as close to a real-time indicator on insider activity as one could hope.

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Both insider selling and insider buying are worth watching as they offer potentially confirming signs of when to buy or sell a security. Given the growing concern over 2Q 2012 earnings, insider selling is a good indicator of companies to avoid, near-term. As the Wall Street logic goes, why should I be buying the shares when insiders are selling?

So what’s been going on in terms of insider selling over the last few weeks? According to Insider Monitor, we find that through June 22, there has been significant insider selling over the last month at companies like information and insight vendor IHS Inc.; FleetCor Technologies, Inc., a global provider of specialized payment products; specialty retailers The Fresh Market Inc., that focuses on perishable goods; Monster Beverage Corp.; Autozone, Inc; and others. Looking at the moves in the stocks over the last month or so, all of them with the exception of IHS are down 8%-11%. Generally speaking, when there is a diverse number of insiders selling shares in size, it’s a red flag that I tend to listen to and so should you.

Turning to those companies that have seen significant insider buying over the last month, we quickly notice that insider buying activity has been far less robust compared to insider selling. Also, at companies that have had insider buying, the diversity among those insiders who are buying has been limited.

It seems to me that insiders are just as concerned about the upcoming earnings season as investors. It is a good thing for PowerTrend Profits subscribers that insiders at several companies recommended in the monthly investment newsletter that I write have started buying shares in June. I suspect they see both the value in the shares and how their businesses stand to benefit from the Great 8 PowerTrends like we do.

Have an enjoyable 4th of July holiday with your family and friends, and I’ll be back next Monday with more.

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Sincerely,

chris

Chris Versace
Editor, PowerTrend Brief

P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, August 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, by going to ChrisVersace.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027877.

This Week

The coming week will start off slowly and likely peak for most Americans with July 4 celebrations that include family, friends and some fireworks. In terms of investing and the stock market, the week also starts off slowly but builds in intensity during the last two days of the week as we get a flurry of job creation and unemployment news. Recent indicators, including weekly jobless claims, as well as surveys from The Business RoundTable and Gallup, point to slower job creation than earlier in the year. On Friday, we will get the “official” view from the Bureau of Labor Statistics, which many observers, including myself, view as having understated the true level of unemployment. A better methodology than relying on one government-provided statistic is to triangulate the various employment reports from ADP, Challenger-Grey, Gallup, Intuit and CBiz to get a more accurate read on job creation. Doing so for the last few months does not provide a rosy view on the jobs market. While Friday’s employment report has its shortcomings, I will examine its findings to see if the worrisome trend of people dropping out of the labor force has continued in June.

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Monday, July 2
ISM Manufacturing Index (June)
Construction Spending (May)
Acuity Brands (AYI)
Imperial Holdings (IFT)
Whirlpool Corp. (WHR)

Tuesday, July 3
Factory Orders (May)
Auto & Truck Sales (June)

Wednesday, July 4
Markets closed

Thursday, July 5
MBA Mortgage Index (Weekly)
Challenger Job Cuts Report (June)
ADP Employment Change Report (June)
Weekly Initial & Continuing Jobless Claims (Weekly)
ISM Services Index (June)
Bassett Furniture (BSET)
International Speedway (ISCA)

Friday, July 6
Employment Report (June)

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Global stocks staged a big rally Friday after European leaders cajoled Germany into participating in a bailout plan that could see money injected directly into European banks.
 
For the week, the S&P 500 climbed 2% and the Dow jumped 1.9%. The NASDAQ lagged with a 1.5% gain, while the MSCI Emerging Markets Index led them all with a rise of 3.57%. All three major U.S averages regained their 50-day moving averages.
 
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