Before I close up my database and move on from insider activity, it's worth taking a peek at insider selling over the past month.
Insider selling is a lot trickier to decipher than insider buying. There is only one reason to buy while there are several valid reasons for an insider to sell some of their shares. They could be paying for their kid's college, a daughter's dream wedding, a nightmare divorce or just doing some simple diversifying and estate planning. For this reason I prefer to focus on cluster selling, where several insiders sell within a short period of time.
Cluster selling is more of an indication that those running the company think it's a good time to take some profits and that it might be time for us to do the same.
Looking at Shake Shack (SHAK), eight insiders combined to sell more than $30 million in stock in the past week. The selling was pretty impressive. There were some large reductions in positions by many of the officers and directors.
I have to confess, I have never bought into the Shake Shack frenzy. At the end of the day it is a burger joint and burger joints are not worth 70+ times anticipated earnings. As the company tries to expand around the country, it will run into other cultish burger joints such as In-N Out and Whataburger and I don't think it will end well. Shake Shack has a whopping 79 locations and the stock is trading at more than six times sales.
In my view, Shake Shack is not a great growth story and most investors would be wise to follow the insiders' lead. The whole hot dog stand to growth company is a great tale but it's not a great investment.
Henry Schein (HSIC) is a solid company with a strong presence in the dental equipment and animal health markets, but the stock appears to be ahead of itself. While the company is growing 10-12% and should be able to do so for the next several years, you are paying a premium multiple for it right now.
The shares currently fetch 29 times earnings and almost 5 times book value. That's simply too high a price, in my view. Several insiders appear to agree: nine of them, including the CEO and CFO have combined to sell more than $8 million of stock in the past month.
HSIC stock has had a great run, more than quadrupling since the market bottom in 2009, but it's probably time to ring the register on this one.
Those willing to buy Lear Corporation (LEA) back in 2010 have been rewarded. Since then, shareholders of the auto parts company have increased more than five-fold. At first glance, the stock looks cheap at just 11 times earnings but the people running Lear are apparently not as confident about the future of the auto sales market. Ten insiders, including the CEO and CFO, have combined to sell more than $34 million of stock in the past month.
Lear sells primarily to the original equipment manufacturer market and given the major strength in auto sales in the past few years, it is reasonable to assume that will slow. If insiders are selling substantial percentages of their holdings right now, we should probably avoid the shares.
A.O Smith (AOS) makes water heaters, boilers and other products for residential and commercial end markets and the executives running the company appear to think we may be on the verge of a slowdown in these areas. Twelve officers and directors have sold more than $2.7 million of stock in the past month.
AOS is another stock that was very good to investors willing to buy when the outlook was bleak back in 2009 -- the shares have advanced seven-fold since then. But looks like it's time to book those gains. At 23 times earnings and more than four times book value, the stock is no longer cheap.
Individual insider sales are often just noise, but when several sell within a short period it is a good idea to consider joining them.
