Yahoo Finance Should You Be Worried When Eaton Corporation plc’s (NYSE:ETN) Insiders Sell?
Eaton Corporation plc operates as a power management company worldwide. Eaton’s insiders have divested from 55.00k shares in the large-cap stock within the past three months. A well-known argument is that insiders divesting from their own companies’ shares sends a pessimistic signal. A two-decade research published in The MIT Press (1998) showed that stocks following insider selling declined 2.7% relative to the market. 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 Eaton
Who Are The Insiders?
More shares have been sold than bought by Eaton’s insiders in the past three months. In total, individual insiders own over 1.57 million shares in the business, which makes up around 0.36% of total shares outstanding.
Insiders that have recently sold some of their shares include Revathi Advaithi (management) , Richard Fearon (management and board member) , Deborah McCoy (board member) and Ken Semelsberger (management) .
Is Future Growth Outlook As Bearish?
On the surface, analysts’ earnings growth projection of -10.3% over the next three years provides negative outlook for the business, consistent 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, and along with high cost growth, is expected to contribute to a highly negative expected earnings growth. Without proper cost controls, earnings could continue to exhibit large negative growth which is unmaintainable.
Divestments by insiders appear to support this ongoing negative outlook. Or else they may merely view any growth potential is already factored into the share price, providing a favourable time to divest.
Can Share Price Volatility Explain The Sell?
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.
In the past three months, Eaton’s share price reached a high of $87.15 and a low of $74.44. This indicates reasonable volatility with a change of 17.07%.
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:
Eaton’s insiders’ meaningful divestments tells us that their shares have recently fallen out of favour, which is consistent with the significant expected earnings growth, even if the low share price volatility did 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. Furthermore, while insider transactions could be a helpful signal, it is definitely not sufficient on its own to make an investment decision. there are two key aspects you should further examine:
Financial Health: Does Eaton 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 Eaton? 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.
