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Did An Insider Sell Their Shares In Cognex Corporation (NASDAQ:CGNX)?

Cognex Corporation provides machine vision products that capture and analyze visual information in order to automate tasks primarily in manufacturing processes worldwide. Cognex is one of United States’s large-cap stocks that saw some insider selling over the past three months, with insiders divesting from 10.00k 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’ve analysed two possible reasons driving the insiders’ decision to reduce their investment of late.

View our latest analysis for Cognex

Which Insiders Are Selling?

NasdaqGS:CGNX Insider Trading September 3rd 18
NasdaqGS:CGNX Insider Trading September 3rd 18

More shares have been sold than bought by Cognex’s insiders in the past three months. In total, individual insiders own over 8.04 million shares in the business, which makes up around 4.67% of total shares outstanding. The insider that recently sold more shares is Anthony Sun (board member) .

Is Future Growth Outlook As Bearish?

NasdaqGS:CGNX Future Profit September 3rd 18
NasdaqGS:CGNX Future Profit September 3rd 18

On the surface, analysts’ earnings growth projection of 137% over the next three years provides a very buoyant outlook for the business. However, this is inconsistent with the signal company insiders are sending with their net selling activity. Delving deeper into the line items, Cognex is believed to experience a restrained level of top-line growth over the next year, but a suggestively greater level of expected earnings growth. Usually this discrepancy can be explained by an equally significant drop in costs. This may not be seen as a maintainable practice by insiders, who may expect a deterioration in earnings to reflect lower revenues growth 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?

An alternative reason for recent trades could be insiders taking advantage of the share price volatility. Volatility provides an opportunity to trade on market inefficiencies when the stock is under-priced compared to the stock’s intrinsic value. Cognex’s shares ranged between $53.8 and $43.74 over the past three months. This indicates reasonable volatility with a change of 23%. This may not be large enough to warrant any significant divesting, therefore the underlying driver may be the insiders’ belief of company growth prospects or simply their personal portfolio diversification needs.

Next Steps:

Cognex’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. But we must also be aware that insiders divesting may not actually be based their views on the company’s outlook. Furthermore, while insider transactions could be a helpful signal, it is definitely not sufficient on its own to make an investment decision. I’ve compiled two essential factors you should further examine:

  1. Financial Health: Does Cognex 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.

  2. Other High Quality Alternatives : Are there other high quality stocks you could be holding instead of Cognex? 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 editorial-team@simplywallst.com.

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