Brinker’s Insider Selling Is a Scary Sign

by Ethan Roberts | September 6, 2013 2:12 pm

Brinker’s Insider Selling Is a Scary Sign

Insiders have been selling a large numbers of shares recently at Brinker International (EAT[1]), the Dallas-based franchiser that owns and operates 1,600 restaurants in the U.S. and abroad, including Chili’s Grill & Bar and Maggiano’s Little Italy.

The stock touched $44 in early August, but has since been on a decline to its current price of $39.23. Three company executives, including CEO and President Wyman Roberts, sold 54,528 shares for a total of $2,261,679 between Aug. 15 and Aug. 28, at prices ranging from $40.66 to $42.10.

Other company executives have also recently sold off millions of dollars worth of shares in the non-open market. Most of the recent activity has been direct sales on the open market. None of the sales have been the automatic kind, which is usually less noteworthy to future stock performance. The chart below shows all of the sales over the two week period in August.

Insider Transactions Reported, Aug. 14-28

Date Insider Shares Type Transaction Value*
Aug 14, 2013 GIBSON, KRISTA M.[2] Officer

8,839

Direct Sale at $42.72 per share.

377,602

Aug 14, 2013 BROOKS, DOUGLAS H[3] Director

157,500

Direct Acquisition (Non Open Market) at $0 per share.

N/A

Aug 14, 2013 GIBSON, KRISTA M .[4]Officer

2,872

Direct Disposition (Non Open Market) at $42.68 per share.

122,576

Aug 14, 2013 PARSLEY, DAVID R[5] Officer

7,735

Direct Disposition (Non Open Market) at $42.68 per share.

330,129

Aug 15, 2013 PARSLEY, DAVID R[5] Officer

10,815

Direct Sale at $42.10 per share.

455,311

Aug 16, 2013 PARSLEY, DAVID R[5] Officer

7,700

Direct Sale at $42 per share.

323,400

Aug 19, 2013 VALADE, KELLI[6] Officer

12,713

Direct Sale at $41.59 per share.

528,733

Aug 20, 2013 ROBERTS, WYMAN[7] Officer

6,300

Direct Sale at $41.75 per share.

263,025

Aug 26, 2013 BREMER, STEVEN CHRIS[8] Officer

493

Direct Disposition (Non Open Market) at $41.37 per share. 20,395
Aug 28, 2013 ROBERTS, WYMAN[7] Officer 17,000 Direct Sale at $40.66 per share. 691,220

As I have discussed before[9], insider selling is most significant when the sales are non-automatic, direct sales, and spread among several different company insiders. The recent selling at Brinker fits the criteria exactly, and is bad news for the stock.

Looking at the accompanying chart, it is striking that Brinker gapped up more than 6% on heavy volume on August 2, but completely reversed course over the next few days. That type of stock action is most unusual. Normally with a breakout like this, the stock would continue higher. The false breakout and subsequent reversal is also likely to be long-term negative for the stock.

EAT Chart Brinker's Insider Selling Is a Scary Sign[10]

Chart courtesy of stockcharts.com[11]

In comparison to Brinker, another restaurant operator stock, Darden Restaurants (DRI[12]), which was lagging Brinker on 2013 performance until the past month, is now beginning to look much more solid.

Darden — based in Orlando, Fla. — owns and operates restaurants throughout the U.S. and Canada. Their franchises include popular names such as Olive Garden, Red Lobster, LongHorn Steakhouse, The Capital Grille and Bahama Breeze.

Darden has pulled back from a June high of $54.66 to a recent low of $46.21. But since then it has rebounded, and is up nicely today to $47.55.

Comparing the two stocks, Darden’s numbers are much better. The company pays a 4.6% dividend yield, while Brinker’s dividend yield is only 2.4%. Darden’s P/E is 15, a bit lower than Brinker’s 17. And Brinker has an extremely high debt/equity ratio of 540, while Darden’s is 131.

The biggest risk with the restaurant sector is the threat of recession or simply a weaker economy. These stocks were destroyed in 2008 when the economy went into a tailspin. When consumers are worried about their finances, they go out to eat less often or spend their money at inexpensive restaurants. Restaurants like Maggiano’s or Olive Garden are eschewed in favor of Mom-and-Pop pizza places.

Therefore, these stocks should be viewed as bellweathers of the economy at large and measures such as unemployment reports. GDP numbers and the consumer confidence index are good indicators of how well these stocks will do going forward.

In a bad economy, investors should favor restaurant stocks such as McDonald’s (MCD[13]) or Yum Brands (YUM[14]). But as long as the economy doesn’t slide back into a recession, Darden should do well over the next six to 12 months — and that near-5% dividend yield doesn’t hurt.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

Endnotes:
  1. EAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=EAT
  2. GIBSON, KRISTA M.: http://biz.yahoo.com/t/81/8975.html
  3. BROOKS, DOUGLAS H: http://biz.yahoo.com/t/43/4138.html
  4. GIBSON, KRISTA M .: http://biz.yahoo.com/t/81/8975.html
  5. PARSLEY, DAVID R: http://biz.yahoo.com/t/64/8555.html
  6. VALADE, KELLI: http://biz.yahoo.com/t/91/8438.html
  7. ROBERTS, WYMAN: http://biz.yahoo.com/t/78/6826.html
  8. BREMER, STEVEN CHRIS: http://biz.yahoo.com/t/30/9088.html
  9. I have discussed before: http://investorplace.com/2012/05/2-more-insider-selling-warnings/
  10. [Image]: http://investorplace.com/wp-content/uploads/2013/09/EAT-Chart.png
  11. stockcharts.com: http://www.stockcharts.com
  12. DRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=DRI
  13. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  14. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM

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