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Alert! A Huge Insider Sale on Kinaxis Stock

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Investors in Kinaxis (TSX:KXS) are happy to see the top TSX tech growth stock recover to reclaim the $200 price point in August 2021. Back in May, I was bullish on recovery, and after a double-dip at lows of $132 a share in February and June this year, KXS’s stock price has recovered quite emphatically before the end of the year. However, as shares rallied, insiders also found it lucrative to sell shares and book some profits.

Its generally believed that insiders know more than general investors do. And sometimes we should do as they do. Should investors start selling Kinaxis stock too?

What happened

During the past week, one key insider, Kinaxis Chief Commercial Officer Paul Carreiro sold common stock worth $1.3 million.

Paul sold some 6,752 common shares in the public market at prices around $194 a share in a filing made on Friday, August 28.

Mr. Carreiro has sold his KXS stock position twice in the last six months, and it seems like he could be selling some more shares during the course of this year.

Other insiders sold Kinaxis stock too

Two more Kinaxis insiders have sold shares during the past three months.

Mr. Carreiro’s recent stock sales follow a significant sale by Monkman Richard George of 25,000 shares in June at around $151 a share and Megan Peterson’s disposal of 11,993 shares during the second week of August 2021 at prices around $175 a share.

The total aggregate number of KXS stock sales by insiders during the recent three months has reached about 45,845 shares for gross proceeds of about $7.2 million.

Do the latest insider sales matter as an investment signal?

My answer to the above question is a big NO. A company’s insiders may sell a stock for several different reasons (and I would personally urge them to do so for some good reasons explained below).

The largest Kinaxis insider stock sale over the past three months was from Richard George Monkman. He was the company’s CFO and was about to go on retirement on the first day of August.

I believe he was wise to exercise some deep-in-the-money stock options at $45 a share and sell his employer’s shares at $151 to enhance liquidity and reduce risks in his retirement portfolio. It’s always wise to do so when transitioning into retirement. You don’t want to deal with too much volatility in your nest egg.

Second, the latest sale by Mr. Carreiro could just be one of many such transactions in the future. The insider holds some 154, 600 vested options that are set to expire soon on November 6, 2022. He has more exposure to Kinaxis stock through another 17,844 restricted rights and over 4,500 performance shares on top of 3,855 common shares. He has only sold a small portion of his KXS position.

Further, options do expire. They must be exercised when it’s significantly profitable to do so. Sometimes one has to borrow liquidity to exercise the options, and selling shares immediately is also a wise decision as it eliminates any transaction risks.

It’s a tricky call on Megan Peterson’s position though. She has a sizeable options position and selling options that expire in 2023 and 2024. There was ample time for those options to go deeper into money over the next two years if Kinaxis stock rises higher. She exercised some options at prices as high as $96 a share and the profits were still handsome at sales prices of $175.

That said, recent insider sales aren’t a convincing signal to sell shares at this stage yet.

Why insiders should sell an employer’s shares

Individuals shouldn’t put too many eggs in one basket. The need for diversification extends to personal sources of income too. If an employer’s business goes down (and insiders have limited power to avoid such mishaps), employees will lose not just employment income (a regular source of primary income): the employers’ stock price may plummet significantly at the same time.

A double blow to your wealth position will hit hard if you lose both your job and your investment portfolio at the same time. Unless it is required in your contract of employment, it’s prudent to limit your exposure to your employer’s stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends KINAXIS INC. Fool contributor Brian Paradza has no position on any stocks mentioned.

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