Pacific Mercantile Bancorp operates as the holding company for Pacific Mercantile Bank that provides a range of commercial banking products and services to small and medium-size businesses, professional firms, and individuals in Southern California, the United States. Pacific Mercantile Bancorp is one of United States’s small-cap stocks that saw some insider selling over the past three months, with insiders divesting from 10.00k shares during this period. 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.
Who Are The Insiders?
More shares have been sold than bought by Pacific Mercantile Bancorp’s insiders in the past three months. In total, individual insiders own less than one million shares in the business, or around 2.18% of total shares outstanding. Latest selling activities involved the following insiders:
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Is This Consistent With Future Growth?At first glance, analysts’ earnings expectations of -35.65% over the next three years illustrates poor outlook for the company, consistent with the signal company insiders are sending with their net selling activity. Digging deeper into the line items, Pacific Mercantile Bancorp is believed to experience a rather subdued top-line growth over the next year, and along with high cost growth, is expected to contribute to a highly negative expected earnings growth. This indicates cost growth has outstripped revenue which is unsustainable. Insiders’ net selling activity seems to bolster this negative sentiment. Otherwise, they may simply view the current share price is well-above the intrinsic value, providing a prime time to sell.
Did Stock Price Volatility Instigate Selling?An alternative reason for recent trades could be insiders taking advantage of the share price volatility. A correlation could mean directors are trading on market inefficiencies based on their belief of the company’s intrinsic value. Within the past three months, Pacific Mercantile Bancorp’s share price traded at a high of $10 and a low of $9.3. This suggests an immaterial change in share price, with a movement of 7.53%. This may mean insiders’ motivation to trade may not be driven by the share price but rather other factors such as their belief in company growth or their personal portfolio diversification needs.
Pacific Mercantile Bancorp’s net selling activity tells us the stock has fallen out of favour with some insiders as of late, coherent with the poor growth in expected earnings, although the share price has not moved significantly to warrant reassessment of mispricing. However it’s crucial to note that insider divesting may have nothing to do with their views on the company’s future performance. 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 relevant factors you should look at:
- Financial Health: Does Pacific Mercantile 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.
- Other High Quality Alternatives : Are there other high quality stocks you could be holding instead of Pacific Mercantile Bancorp? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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 firstname.lastname@example.org.