The Home Depot, Inc. operates as a home improvement retailer. Home Depot is one of United States’s large-cap stocks that saw some insider selling over the past three months, with insiders divesting from 5.33k 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. 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 Home Depot’s insiders in the past three months. In total, individual insiders own over 1.42 million shares in the business, which makes up around 0.12% of total shares outstanding.
Latest selling activities involved the following insiders: Matthew Carey (management) and William Lennie .
Is Future Growth Outlook As Bearish?
At first glance, analysts’ earnings expectations of 37.6% over the next three years illustrates a strong outlook going forward. But this is not consistent with the signal company insiders are sending with their net selling activity.
Probing further into annual growth rates, Home Depot is believed to experience a rather subdued top-line growth over the next year, but a double-digit earnings growth at 13.8%. This may mean the company has effectively managed costs in order to pump up earnings growth.
This may not be seen as a maintainable practice by insiders, who may expect a decline in earnings to reflect lower revenues in the future. Or they may merely view the stock as overvalued by the market which provides a suitable time to sell.
Did Stock Price Volatility Instigate Selling?
Another factor we should consider is whether the timing of these insider transactions coincide with any significant share price movements. A correlation could mean directors are trading on market inefficiencies based on their belief of the company’s intrinsic value.
Home Depot’s shares ranged between $213.85 and $193.1 over the past three months. This suggests a relatively insignificant share price movement, with a small change of 10.75%.
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.
Home Depot’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 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. there are two relevant factors you should further research:
- Financial Health: Does Home Depot 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 Home Depot? 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.