ArQule, Inc., a biopharmaceutical company, researches and develops therapeutics for the treatment of cancer and rare diseases in the United States. ArQule’s insiders have divested from more than 1.04 million shares in the small-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 research published in The MIT Press (1998) concluded that stocks following insider selling fell 2.7% compared to the market. However, these signals may not be enough to gain conviction on whether to divest. Today we will evaluate whether these decisions are bolstered by analysts’ expectations of future growth as well as recent share price movements.
Which Insiders Are Selling?
There were more ArQule insiders that have sold shares than those that have bought. In total, individual insiders own over 1.27 million shares in the business, which makes up around 1.17% of total shares outstanding.The entity that sold on the open market in the last three months was BVF Partners LP. Although this is an institutional investor, rather than a company executive or board member, the insights gained from direct access to management as a large investor would make it more well-informed than the average retail investor. In this specific instance, I would classify this investor as a company insider.
Does Selling Activity Reflect Future Growth?
On the surface, analysts’ revenue growth projection of 48.08% 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. Delving deeper into the line items, ArQule is expected to experience decline in top-line growth next year, which could imply some headwinds going forward. This will likely flow through to its earnings next year, illustrated by a highly negative growth expectation, implying cost management may not be effective enough to bring the company into positive earnings growth. Selling activities by insiders seem to be consistent with this pessimistic future prospect. Or they may simply deem the current share price is well-above its intrinsic value, providing an opportune time to sell.
Did Stock Price Volatility Instigate Selling?
Alternatively, the timing of these insider transactions may have been driven by 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, ArQule’s share price traded at a high of $6.81 and a low of $2.48. This suggests a significant level of volatility in share price with a change of 174.6%. Insiders could perceive this meaningful movement as an opportunity to reduce their shareholdings. Or else, they may simply sell for their own portfolio diversification purposes or need cash for personal reasons.
ArQule’s net selling activity tells us the stock has fallen out of favour with some insiders as of late, reinforced by the negative earnings growth expectations, in addition to the large share price movement around the same time. However, it’s important to keep in mind, insider selling may not necessarily be based on their belief of the company’s ability to perform in the future. Moreover, while insider selling can be a useful prompt, following the lead of an insider, however, will never replace diligent research. I’ve compiled two relevant factors you should further research:
- Financial Health: Does ArQule 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 ArQule? 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 firstname.lastname@example.org.