Franklin Electric Co., Inc., together with its subsidiaries, designs, manufactures, and distributes water and fuel pumping systems worldwide. Franklin Electric is one of United States’s large-cap stocks that saw some insider selling over the past three months, with insiders divesting from 1.50k shares during this period. A well-known argument is that insiders divesting from their own companies’ shares sends a pessimistic signal. A two-decade research published in The MIT Press (1998) showed that stocks following insider selling declined 2.7% relative to the market. But these signals may not be sufficient to gain confidence on whether to divest. I’ve analysed two possible reasons driving the insiders’ decision to reduce their investment of late.
Who Are The Insiders?
Over the past three months, more shares have been sold than bought by Franklin Electric’s insiders. In total, individual insiders own over 7.77 million shares in the business, which makes up around 16.63% of total shares outstanding. The insider that recently sold more shares is Donald Kenney (management) .
Does Selling Activity Reflect Future Growth?
From the outside, Franklin Electric’s future looks muted. Digging deeper into the line items, Franklin Electric is expected to experience a restrained level of top-line growth over the next year, but a double-digit earnings growth at 25.8%. This may mean the company has effectively managed costs in order to pump up earnings growth. However, this exercise may not be viable over the long run which may prompt insiders to reconsider their shareholdings. Or else they may view the market has overvalued the stock, presenting a favourable environment to sell.
Can Share Price Volatility Explain The Sell?
Alternatively, the timing of these insider transactions may have been driven by share price volatility. This means, if insiders believe shares were heavily undervalued recently, this would provide a prime opportunity to buy more irrespective of its growth outlook. Franklin Electric’s shares ranged between $49.8 and $45.05 over the past three months. This indicates a trivial share price movement, with a change of 10.54%. Potentially, insider transactions are not share price related but may be due to their belief on what will happen to the company in the future or simply just personal cash and diversification needs.
Franklin Electric’s net selling activity tells us the stock has fallen out of favour with some insiders as of late, however, this is rather cautious relative to analysts’ earnings expectation, and the share price has not moved significantly to warrant reassessment of mispricing. However, it’s important to keep in mind, insider selling may not necessarily be based on their belief of the company’s ability to perform in the future. Moreover, while insider selling can be a useful prompt, following the lead of an insider, however, will never replace diligent research. I’ve put together two essential factors you should further research:
- Financial Health: Does Franklin Electric have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Other High Quality Alternatives : Are there other high quality stocks you could be holding instead of Franklin Electric? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.