Cogent Communications Holdings, Inc., through its subsidiaries, provides high-speed Internet access and Internet protocol communications services primarily to small and medium-sized businesses, communications service providers, and other bandwidth-intensive organizations in North America, Europe, and Asia. Cogent Communications Holdings is one of United States’s large-cap stocks that saw some insider selling over the past three months, with insiders divesting from 32.50k shares during this period. It is widely considered that insider selling stock in their own companies is potentially a bearish signal. The MIT Press (1998) published an article showing that stocks following insider selling underperformed the market by 2.7%. However, these signals may not be enough to gain conviction on whether to divest. I will be analysing whether these selling activities are supported by favourable future outlook and recent share price volatility.
Who Are Selling Their Shares?
Over the past three months, more shares have been sold than bought by Cogent Communications Holdings’s insiders. In total, individual insiders own over 4.7 million shares in the business, which makes up around 10.41% of total shares outstanding.
Latest selling activities involved the following insiders: .
Is Future Growth Outlook As Bearish?
At first glance, analysts’ earnings expectations of 379% over the next three years illustrates a very optimistic outlook for the business. However, this is inconsistent with the signal company insiders are sending with their net selling activity.
Probing further into annual growth rates, analysts anticipate a double-digit top-line growth over the next year, which seems to drive higher expected earnings growth as well. This may mean the company is reaping meaningful benefits from past growth initiatives, placing it in a beneficial position for future profits.
Insider net selling activity is counter to what we’d expect given a significantly positive earnings outlook, indicating they may know something the market does not. Insiders could perceive the high growth as unsustainable or that it has been excessively factored into the current share price.
Can Share Price Volatility Explain The Sell?
Another factor we should consider is whether the timing of these insider transactions coincide with any significant share price movements. Volatility provides an opportunity to trade on market inefficiencies when the stock is under-priced compared to the stock’s intrinsic value.
In the past three months, Cogent Communications Holdings’s share price reached a high of $56.15 and a low of $49.8. This indicates an immaterial change in share price, with a movement of 12.75%.
This may mean insiders’ motivation to trade may not be driven by the share price but rather other factors such as their belief in company growth or their personal portfolio diversification needs.
Cogent Communications Holdings’s insiders’ meaningful divestments tells us that their shares have recently fallen out of favour, although the positive expected earnings growth challenges this assumption, and the relatively stable stock price may not warrant exploiting any mispricing. However it’s crucial to note that insider divesting may have nothing to do with their views on the company’s future performance. Moreover, while insider selling can be a useful prompt, following the lead of an insider, however, will never replace diligent research. there are two important factors you should further research:
- Financial Health: Does Cogent Communications Holdings 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 Cogent Communications Holdings? 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.