NetApp, Inc. provides software, systems, and services to manage and share date on-premises, and private and public clouds worldwide. NetApp’s insiders have divested from 55.11k shares in the large-cap stock within the past three months. It is widely considered that insider selling stock in their own companies is potentially a bearish signal. A research published in The MIT Press (1998) concluded that stocks following insider selling fell 2.7% compared to the market. But these signals may not be sufficient to gain confidence on whether to divest. I’ve assessed two potential reasons behind the insiders’ latest motivation to sell their shares.
Who Are The Insiders?
Over the past three months, more shares have been sold than bought by NetApp’s insiders. In total, individual insiders own less than one million shares in the business, or around 0.12% of total shares outstanding. The insider that recently sold more shares is Joel Reich (management) .
Is This Consistent With Future Growth?
Analysts’ expectations for earnings over the next 3 years of 441% provides a spectacular outlook for the business. However, this is inconsistent with the signal company insiders are sending with their net selling activity. Digging deeper into the line items, analysts anticipate a rather subdued top-line growth over the next year, although a significantly greater rate of earnings growth. This could indicate large cost-cutting initiatives by the company to boost its earnings. However, this exercise may not be viable over the long run which may prompt insiders to reconsider their shareholdings. Or else they may view the market has overvalued the stock, presenting a favourable environment 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. This means, if insiders believe shares were heavily undervalued recently, this would provide a prime opportunity to buy more irrespective of its growth outlook. In the past three months, NetApp’s share price reached a high of $85.94 and a low of $66.79. This indicates moderate volatility with a share price movement of 28.67%. 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.
NetApp’s insiders’ meaningful divestments tells us that their shares have recently fallen out of favour, however, this is rather cautious relative to analysts’ earnings expectation, and the share price movement may be too trivial to cash in on any mispricing. But we must also be aware that insiders divesting may not actually be based their views on the company’s outlook. Moreover, while insider selling can be a useful prompt, following the lead of an insider, however, will never replace diligent research. I’ve put together two essential aspects you should look at:
- Financial Health: Does NetApp 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 NetApp? 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.