This morning, as I started to get ready for what promises to be a great weekend here in the Mid-Atlantic, I continued to review insider buying activity, as I've done all week, looking for some bargain opportunities. Insider buying has been a valuable tool I've used over the years as a source, as a measure of confirmation of finding cheap stocks and to uncover stocks to avoid or short.
Although legitimate reasons exist for insiders to sell stocks in a large sale, a pattern of selling can often indicate that insiders think the stock has run too far or business prospects have dimmed. It is a very good way to discover candidates for some of my chicken short positions using put options and spreads.
The list of stocks showing heavy insider selling right now contains many popular stocks, which comes as no surprise. On Wall Street, "popular" implies overvalued much of the time. One stock that I think is very vulnerable here is Salesforce.com (CRM). The stock has been a powerhouse over the past few years, rising roughly seven-fold since 2009. However, all the good news and potential growth appears to be priced into the stock, in my opinion.
In addition, the company faces some obstacles in the short term, as higher marketing and research and development (R&D) costs are going to hurt the bottom line. CRM's stock trades at a staggering 63x estimated profits for next year. Insiders appear to agree and have been steady sellers of the stock. I see a huge red flag in the fact that the company's CFO is among the largest sellers of the stock. If I owned it, I would take profits here. I will also discern if a put spread can be established at a decent risk-reward ration.
Over-the-counter and generic drug company Perrigo (PRGO) shares have performed greatly. The company has seen its stock quadruple since 2009, and growth has been fueled by a stream of new product launches in the OTC drug market as well as acquisitions to continually expand the product line. It is a good company, but the stock is priced far too richly in my opinion, and in the past few months insiders have sold more than 400,000 shares. This is another stock to sell and look for option trades to create a low-risk, short position.
In addition to a pattern of insider sales, I watch for large sales by company CEOs. The person at the top is in the best position to formulate a picture of the company's valuations and prospects, and I pay attention when CEOs sell a significant block of stock. Some of the high-flying retail stocks show a pattern of CEO selling. Michael Jefferies of Abercrombie & Fitch (ANF) just sold 100.000 shares of his position. Day Christine McCormick at Lululemon (LULU) just sold another 70,000 shares of her yoga apparel company. Glenn Lyon at Finish Line (FINL) sold 44,000 shares of his company. If I owned these stocks going into the critical, year-end selling season, I would take my gains and move on. Of course, I will look at these stocks to see about setting up a chicken short with high profit potential.
Insiders know more about their companies than analysts and investors. If they are selling their shares, then why should we own them? It's often a good idea to join the officers and directors in selling the stock, and even shorting the shares.