Sell This Stock Now, Ask Questions Later
Sometimes it’s best to sell first and ask questions later. When insiders dump shares at a fast pace, the odds are something sits over the horizon that will derail the share price, but it isn’t yet obvious to public investors.
The information asymmetry insiders enjoy can only be glimpsed through insider transactions, and right now those transactions are screaming a sell on one high-flying stock.
Impressive Sales, What’s Not To Like?
ServiceNow has had a spectacular year. It’s risen by 22% in just a month or so.
The technical trend is a thing of beauty, and it’s easy to be lulled into complacency as a shareholder.
Not only that but the fundamentals look impressive too. Revenue growth over the past five fiscal years has been fast, in spite of economic headwinds, a pandemic, inflation scares, and rising rates.
- 2018: +36.0%
- 2019: +32.6%
- 2020: +30.6%
- 2021: +30.5%
- 2022: +22.9%
That kind of consistent top line growth in a turbulent world of booms and busts is exactly the type of stability investors laud.
Even more impressive is how management has kept costs under control and has boosted operating income at a rapid pace.
- 2018: $13.7M
- 2019: $100M
- 2020: $183M
- 2021: $257M
- 2022: $344M
What’s not to like?
Scary Insider Transactions
On the face of it, ServiceNow has all the hallmarks of a company you would want to own. Sales and operating income look good, and management appears to have a good handle on operational efficiency and execution.
Even analysts are bullish on the stock. The consensus fair value for ServiceNow sits at $522 per share, a full $50 higher than where the share price currently sits.
But something lurks under the surface that is downright scary. Insider transactions are positively terrifying. We analyze the last 32 transactions by insiders and a full 31 of them were distributions. In short, insiders are overwhelmingly selling.
But wait, there’s more.
CEO William McDermott just dumped $24,745,914 worth of stock. That sounds like a lot, and it is. It represents 90% of his holdings in the company.
Now the question for shareholders is why would the Chairman and CEO of a company dump virtually all of his holdings now?
For public investors, the answer is unlikely to surface anytime soon. But the proportion of stock he sold is so large that risk-averse investors probably shouldn’t stick around to find out.
Certainly, the reasons for such a sale may have merit, and be unrelated to the company. But do you really want to assume that risk?
A caution-first approach would demand selling now, and asking questions later. It’s up to you to decide. Follow the lead of the number one in command at ServiceNow, who has more information, or run the gauntlet and hope his sale has little merit.