Insider selling can signal horrible things to come for stock prices but is not always a harbinger of doom. Share-based compensation is a common practice among publicly traded and private corporations and can result in an active insider market. Remember, insiders aren’t allowed to sell their shares at will; they are restricted by Federal, state, and exchange regulations that could land them in jail for making knee-jerk inside trades that front-run the market.
The stocks we’re looking at today fall into that category: stocks with actively selling insiders caused by share-based compensation, but that is the worst that can be said. All 3 have solid businesses and an outlook for shareholder returns that makes them attractive opportunities.
Unity Software flexes pricing power
Unity Software (NYSE: U) received some mixed coverage following its announcement about prices. The company is altering its pricing structure in favor of revenue growth, which has some analysts concerned it will drive game-development business away. What investors should be aware of is that fees only impact new clients using premium services whose games cross two significant thresholds. Ultimately, only games with high volume will be charged, and those games require more resources to operate.
The caveat regarding the analysts' downgrades is that for every negative comment, there is a positive, and the sentiment in the stock is holding firm. Insidertrades.com tracks 19 analysts with current ratings that have the stock pegged at firm Hold, verging on Moderate Buy with an equally firm price target. That target assumes a 60% upside from current stock price levels.
Unity insiders made 17 sales over the past 90 days. The sales are by 11 insiders, including several C-suite execs and directors. The sales are small and regular, consistent with share-based compensation, and leave insider holdings at a still-robust 9%. The worry is from the institutional angle. The institutions sold heavily in Q3 and may continue to do so in Q4. The caveat for bears is that this company is expected to grow revenue by 20% this year to the next, and the estimates may be too low. The company has outperformed regularly, and the new fees, which take effect in January 2024, have yet to be factored in.
Proctor & Gamble's inside sales are no worry for investors
Proctor & Gamble’s (NYSE: PG) insider sales are even less of a worry than Unity Software’s, and there is little reason to worry about Unity Software. For 1, Proctor & Gamble insiders own a meager 0.17% of the stock, so have little impact on the market other than sentiment. Their sales are consistent with shares received as compensation and should be expected to continue. Unlike Unity, institutions are buying Proctor & Gamble in bulk. Institutions own about 64% of the stock, and their buying is consistent with the upward bias in the price action.
One reason the institutions are buying is Proctor & Gamble’s results, another is the dividend, and yet another is the value. Trading at 23X earnings, it is no value compared to the broad S&P 500, but it is fairly valued for a top-shelf consumer staple stock with a yield near 2.5%. The distribution is reliable at 60% of earnings for this Dividend King, and there is growth in the forecast. The Q3 results were better than expected, including widening margins and favorable guidance that has analysts raising their estimates.
Datadog insiders sell, institutions buy
Datadog (NASDAQ: DDOG) insiders are selling, but their sales are not concerning and are offset by institutions. The insiders own about 15% of the stock, so they have considerable skin in the game, while institutions, which own about 68% of the stock, have been buying all year. Analysts are also bullish on the stock, rating it a Moderate Buy with a price target about 25% above the recent action. There was some worry when the company lowered its FY revenue guidance at the end of Q2, but not enough to sway sentiment; analysts have been raising their targets for Q3 results, which are due out in November.