Town Sports International Holdings, Inc., together with its subsidiaries, owns and operates fitness clubs in the Northeast and Mid-Atlantic regions of the United States. Town Sports International Holdings is one of United States’s small-cap stocks that saw some insider selling over the past three months, with insiders divesting from 51.31k shares during this period. A well-known argument is that insiders divesting from their own companies’ shares sends a pessimistic signal. A research published in The MIT Press (1998) concluded that stocks following insider selling fell 2.7% compared to the market. However, these signals may not be enough to gain conviction on whether to divest. Today we will evaluate whether these decisions are bolstered by analysts’ expectations of future growth as well as recent share price movements.
Which Insiders Are Selling?
More shares have been sold than bought by Town Sports International Holdings’s insiders in the past three months. In total, individual insiders own over 2.1 million shares in the business, which makes up around 7.71% of total shares outstanding.
Insiders that have recently trimmed down their holdings are Carolyn Spatafora (management) and Nitin Ajmera (management) .
Does Selling Activity Reflect Future Growth?
On the surface, analysts’ earnings growth projection of -5.7% over the next three years provides negative outlook for the business, consistent with the signal company insiders are sending with their net selling activity.
Probing further into annual growth rates, Town Sports International Holdings is expected to experience a limited level of revenue growth next year, which impacts its earnings expectation resulting in a highly negative growth rate. This indicates cost growth has outstripped revenue which is unsustainable.
Selling activities by insiders seem to be consistent with this pessimistic future prospect. Or they may simply deem the current share price is well-above its intrinsic value, providing an opportune time to sell.
Did Insiders Sell On Share Price Volatility?
An alternative reason for recent trades could be insiders taking advantage of the 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.
Within the past three months, Town Sports International Holdings’s share price traded at a high of $14.75 and a low of $8.25. This suggests a substantial share price volatility with a change of 78.79%.
This movement is meaningful enough to trade on if directors believe the market has mispriced their companies’ shares. Alternatively, they may simply want to diversify their holdings, distribute stock to investors, or simply require the cash for personal reasons.
Town Sports International Holdings’s net selling activity tells us the stock has fallen out of favour with some insiders as of late, which is consistent with the significant expected earnings growth, as well as the significant share price volatility over the same period of trade. 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 compiled two fundamental aspects you should further examine:
- Financial Health: Does Town Sports International 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 Town Sports International 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 firstname.lastname@example.org.