Following strong rallies that defied the broader stock market, corporate insiders at defensive pharmaceutical companies Catalyst Pharmaceuticals (NASDAQ:CPRX) and Bristol-Myers Squibb Company (NYSE:BMY) have been selling their employers’ stock in large numbers so far this month. While insider selling is not necessarily a Sell signal, it’s something worth noting.
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This is because corporate insiders have a deeper knowledge of a company’s business and can foresee changes in its operating environment way ahead of the general investing public.
The TipRanks Insider Trading tool has identified recent SEC filings by corporate insiders in the two pharma stocks mentioned above and deemed them “informative.”
Catalyst Pharmaceuticals (CPRX)
Catalyst Pharmaceuticals is a commercial-stage biopharmaceutical company that was recently added to the S&P SmallCap 600 Index on September 15. Since August this year, corporate insiders have had a hive of activity on CPRX stock. What started as a race to exercise stock options by employees and executives around mid-August is translating into a selling spree as key corporate insiders cash in on CPRX stock’s recent gains.
Chief among recent insider sales is Catalyst’s President and Chief Executive Officer Patrick McEnany’s (a five-star-rated insider) disposal of 946,846 shares worth $14.6 million on the public market on September 14. Chief Operating Officer Steve Miller sold $1.8 million worth of shares, while the company’s Treasurer and Chief Financial Officer, Alicia Grande, has been actively selling shares since late August.
In total, corporate insiders at Catalyst Pharmaceuticals have sold $30.1 million worth of their company’s stock during the past three months. Net buying in August has given way to net selling so far in September.
Could Insider Sales be a Signal to Sell CPRX?
Not exactly. However, there is an embedded signal from recent heavy insider trading. Executives at Catalyst Pharmaceuticals took the chance to book some significant profits as their stock options went deep into the money in August when CPRX stock rallied to hit all-time highs and nearly doubled for the year by September. Perhaps the insider activity signals a temporary plateauing in their employer’s stock price.
To a short-term focused investor, elevated insider sales of CPRX stock could be a negative signal that insiders believe CPRX shares have become overvalued following a good run. The stock may have plateaued for now, and momentum may be lost. Indeed, shares are down about 7% over the past five trading days.
Perhaps it’s time to wait for a pullback and consolidation before buying new shares.
Should you Buy or Hold CPRX Stock?
Catalyst Pharmaceuticals stock earns a Strong Buy consensus rating from Wall Street analysts based on four Buys and one Hold rating in the past three months. The average CPRX stock price target of $16.70 per share implies 34% upside over the next twelve months.
A strong rally in Catalyst Pharmaceuticals stock might have been amplified by institutional buyers and index fund managers as CPRX entered the S&P SmallCap 600 Index. Liquidity was rising. Perhaps there was no better time for insiders with huge positions to take profit without harming the stock. Insiders probably know that very well.
Otherwise, the company’s fundamentals remain intact. Revenue is growing at a double-digit clip, and Wall Street analysts project earnings for 2022 to surge by 89% year-over-year. Cash flows are piling up too. I would rate it a Hold, personally.
Bristol-Myers Squibb (BMY)
Therapeutic and specialty drugs developer Bristol-Myers Squibb’s Chief Financial Officer David Elkins sold 133,951 common shares on September 13 at $71.30 per share and pocketed more than $9.5 million. The transaction followed an exercise of 123,277 stock options at $48.49. Thus, the CFO sold more shares than those purchased following options exercises.
The $148.3 billion company’s Board Chair and Chief Executive Officer Giovanni Caforio also sold 50,000 shares valued at $3.6 million last week. He continues to hold more than 501,000 shares, so the sale’s signal is muted. However, the Chief Human Resources officer joined the duo and sold a third of her position, or 25,000 BMY shares worth nearly $1.8 million, and retained 50,000 shares.
In all, corporate insiders at Bristol-Myers Squibb sold $14.9 million worth of their employer’s common stock over the past three months.
What Could Insider Sells of BMY Stock Signal to Investors?
Insider sales of Bristol-Myers Squibb stock could be another profit-taking opportunity. BMY stock is an S&P 500 (SPX) constituent that recently printed new all-time highs in July and has significantly outperformed the broader market index so far this year, as its 11.4% year-to-date gain trounces the S&P index’s 19% decline.
IS BMY Stock a Buy, Hold, or Sell?
Bristol-Myers Squibb retains a consensus Moderate Buy rating from Wall Street analysts based on six Buys, three Holds, and just one Sell rating assigned during the most recent three months. The average BMY stock price target of $79.33 per share implies 14.2% upside potential over the next twelve months.
BMY stock pays a quarterly dividend that yields 3.1% annually. Shares may continue to reward investors with positive returns over the long term. The company remains a defensive pharmaceutical stock to buy and hold for long-term capital gains potential and respectable dividend income.
Bristol-Myers Squibb enjoys strong pricing power on its specialty drugs portfolio. It produces billions in free cash flow every year. It’s paying off chunks of debt and could use free cash flow to acquire growth opportunities and/or repurchase shares. I would rate it as a Hold.
Conclusion: Not All Insider Trades are the Same
Insiders can sell their employer’s stock for several personal reasons, some of which may include the need for wealth diversification as portfolios reach certain values. For that reason, insider sales may carry lower informational value than buying activity (insiders usually buy their employer’s stock for its upside potential).
That said, key insiders, including CEOs, CFOs, and COOs, may have a deeper knowledge of a company’s strategy, internal financial and operational capabilities, and potential market opportunities than any other insiders. Their selling activity should raise eyebrows, especially if recent sales significantly reduce their skin in the game.
