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Should You Be Worried When Territorial Bancorp Inc’s (NASDAQ:TBNK) Insiders Sell?

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Dane Simmons
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Territorial Bancorp Inc. operates as the holding company for Territorial Savings Bank that provides various financial services to individuals, families, and businesses. Territorial Bancorp’s insiders have divested from 14.82k shares in the small-cap stock within the past three months. 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 will be analysing whether these selling activities are supported by favourable future outlook and recent share price volatility.

View our latest analysis for Territorial Bancorp

Which Insiders Are Selling?

NasdaqGS:TBNK Insider Trading August 31st 18
NasdaqGS:TBNK Insider Trading August 31st 18

More shares have been sold than bought by Territorial Bancorp’s insiders in the past three months. In total, individual insiders own less than one million shares in the business, or around 8.24% of total shares outstanding. Insiders that have recently trimmed down their holdings are Allan Kitagawa (management) , David Murakami (board member) and Ralph Nakatsuka (management and board member) .

Does Selling Activity Reflect Future Growth?

NasdaqGS:TBNK Future Profit August 31st 18
NasdaqGS:TBNK Future Profit August 31st 18

On the surface, analysts’ earnings growth projection of 24.3% over the next three years provides a satisfactory outlook for the company. However this is inconsistent with the signal company insiders are sending with their net selling activity. Probing further into annual growth rates, analysts anticipate a limited level of revenue growth next year, however, earnings growth is expected to be strong at 22.9%. This may mean the company’s cost-cutting initiative will be significant enough to boost earnings. 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. Territorial Bancorp’s shares ranged between $31.85 and $29.85 over the past three months. This suggests a trivial share price movement, with a change of 6.7%. Potentially, insider transactions are not share price related but may be due to their belief on what will happen to the company in the future or simply just personal cash and diversification needs.

Next Steps:

Territorial Bancorp’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 relatively stable stock price may not warrant exploiting 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 key factors you should look at:

  1. Financial Health: Does Territorial Bancorp 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 Territorial Bancorp? 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.