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Does the Insider Selling Imply That It Is Time to Exit CME Group?

When investors do their stock picking by following gurus or hedge fund managers, it is important for them to keep track of when these parties are actually exiting their investments. When a stock starts witnessing selling, not just from fund managers, but also company insiders, it is certainly a worrying sign. CME Group Inc. (NASDAQ:CME) is one such company that is facing this situation currently.


About the company

CME Group, previously known as the Chicago Mercantile Exchange, is one of the oldest financial marketplaces in the U.S. Founded in 1898, the Chicago-based company is known for providing an electronic trading platform to individual as well as institutional customers for transacting in various asset classes, including forex, commodities, equity indexes, financial derivatives and more. It was among the first players to provide bitcoin futures two years ago.

Foray into bitcoin-related derivatives

CME has received a fantastic response since the launch of bitcoin futures. It saw more than 3,500 individual accounts making use of this service and about 6,500 bitcoin future contracts being traded every single day on its platform. Interestingly, almost half of this volume is through international traders. In fact, upon seeing CME's success, its biggest competitor, Intercontinental Exchange Inc. (NYSE:ICE), also launched its own bitcoin futures contracts in September.

After this success, the company announced options on its bitcoin futures contracts that will be available for trading from January 2020 onward, assuming that CME gets regulatory approval. Management is expecting some solid growth in the bitcoin derivatives market, so the purpose of launching this product is to provide additional avenues and greater flexibility of hedging to the bitcoin positions. While regulatory approval continues to be pending, the financial impact of this product on CME's top line and its stock price is yet to be seen.

Insider and guru selling followed excellent results

For the third quarter, CME posted results that surpassed Wall Street's expectations. Revenue of $1.28 billion beat analysts' expectations of $1.27 billion, achieving year-over-year growth of more than 30%. Earnings of $1.9 per share edged past estimates of $1.76.

Around this time, the share price was at a high, but two gurus, Tom Gayner (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio), sold out of their stakes in the company. Mario Gabelli (Trades, Portfolio) and Ron Baron (Trades, Portfolio) also reduced their exposure to the stock.

It is evident in the chart above that there has been a lot of guru selling activity. There has also been a large amount of insider selling. As per the chart below, over the past year, there has been almost no insider buying and the company's directors have just been liquidating the stock and cashing in on their investments.

Is there something fundamentally wrong with CME?

It is actually hard to explain the factors behind the heavy selling activity for CME. Historically, the company has performed well, climbing approximately 73% over the past three years. It has performed on par with Intercontinental Exchange and has also provided a decent yield. The company's current dividend yield is 1.45%, whereas its yield-on-cost is above 2%, which is quite good for a stock that is also providing capital appreciation. CME's fundamentals appear reasonably strong as it has a net margin of 40.93%, resulting in a return on equity of 7.9%. With a debt-to-equity ratio of 0.15, the gearing is also well under management's control.

The problem, then, might lie in the valuation. The company is trading at a price-earnings ratio of 35.85, which is definitely on the higher side, particularly with respect to the industry it operates in. The same applies to the enterprise value-to-revenue multiple of 15.25, which is indicative of the market's optimism in regard to this stock.

Based on these factors, it seems the gurus might have considered the fact there might not be much appreciation in CME in the short or medium term, which is why they decided to book their profits and put their capital to better use.

Key takeaways

The guru and insider selling of CME has not caught the market's attention. The stock is stable and there are quite a few notable funds that continue to hold large stakes in the company. Some of these big names include Cantillon Capital Management, Renaissance Technologies, Ken Griffin's Citadel Investment Group and VGI Partners.

Additionally, some of these investors have very high portfolio weights assigned to CME (in the case of VGI Partners, the stock accounts for more than 15% of the total portfolio). These funds still have faith in the company and its continued growth. At this stage, it is important for investors to keep track of not only the company's results and updates, but also the moves of these fund managers. Guru sales can often have a cascading effect, so if more fund managers begin to sell soon, then maybe it is worth considering other investment opportunities.

Disclosure: No positions.

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This article first appeared on GuruFocus.