Where Insiders Are Shedding Shares
If a company's executive officers and directors are selling their stakes, small investors might wonder if something is in the wind. While insider-selling scandals in recent years spooked investors, stock sales by top brass generally don't indicate a problem. It often comes down to plain old financial planning: With so much money tied up in company stock, insiders want to diversify their assets.
Standard & Poor's analyst Tom Graves discourages trying to divine trends in companies that see a high degree of insider selling. "It's very hard, if [it's] even possible to know why individuals are making financial decisions as to what they want to own." Since insiders tend to maintain enormous stakes in the companies, it hardly betrays a lack of confidence in a company's future. However, it can create a perception of a lack of confidence. To counter this view, companies sometimes make public plans to sell large quantities of stock over a fixed period of time.
But huge sales amounting to tens of millions of dollars—or significant chunks of a company's total shares outstanding—are something many investors want to keep tabs on, especially if trends persist or more insiders join in on the selling. At the very least, sales may indicate that execs may see limited upside in the shares in the near future and therefore choose to hit the "sell" button.
Where are the bigwigs taking some serious cash off the table? This week, Five for the Money takes a look at big companies where insiders have recently sold off blocks of stock. For some of these outfits, analysts still see solid prospects, so you may wonder if execs are unloading shares too early.
Salesforce.com (CRM), an outfit providing Internet-based customer-relations management products, has seen its fair share of insider selling in its short history as a public company. According to Securities & Exchange Commission filings, in the 12 months ending in late May, founder and chairman Marc Benioff sold more than 5 million beneficially owned shares, almost 5% of the company's outstanding total. During that period, as Benioff and insiders with far smaller stakes sold shares, the volatile stock climbed above $40 before ending May at $29.51 per share.
Since then it has sunk further to close at $22.95 on July 19.The company has continued to deliver SEC filings indicating insider sales.
"I don't think this is a case where managers are thinking this company is about to sink" says Standard & Poor's analyst Zaineb Bokhari. She says this sort of heavy divestment is fairly standard practice for a tech company. Despite recent declines in the stock, Bokhari calls the company a "leader in an emerging field" with a potential for continuing rapid growth.
Benioff likely agrees: According to a filing, he held 22.8 million shares as of late May. (The filing was dated May 24.)
2. Las Vegas Sands
In March, 2006, Las Vegas Sands' (LVS) Chairman Sheldon Adelson took a big pile of chips off the table. Using a secondary stock offering, he sold 55 million shares of the company for $50.25 each, reducing his stake in the hotel and casino group to just under 71%, from 84%. Investors, however, seem unfazed, as share prices have since climbed, closing at $69.60 on July 19. As often occurs in such instances, the Sands was a closely held stock that had enjoyed a strong run. It closed April, 2005 below $40.
The company intends to expand its presence in Macau, a gambling haven near Hong Kong. The plans include a branch of its flagship Venetian Resort Hotel Casino. While he emphasizes that his opinion is independent of insider selling, S&P's Graves is bearish on the stock. Rating it a sell, he says "the stock price more than adequately reflects the value that has been created." And Las Vegas Sands' future growth prospects will be closely tied to its fortunes in unproven areas such as Macau and Singapore.
While they're not exactly heading for the life rafts, Carnival (CCL) insiders have shed shares, even as some analysts continue to see it as a buy. According to SEC filings, the world's largest cruise company's chairman Micky Arison sold 15.5 million shares, more than 2% of the cruise outfit's common stock in the year ending Feb. 21, when the share price never fell below $45. Carnival spokesman Tim Gallagher points out that Arison had voting power in, but not the actual ownership of, almost all of these shares. The rest belonged to family members without management roles.
After February, the stock soured a bit. On May 16, it dropped to a 52-week low of $41.35 after the company reduced its earnings outlook. On July 19, shares closed at $40.49. Gallagher says the drop is due to fuel prices. Still, he asserts that Carnival is getting cash to shareholders through increased dividends and buybacks.
At these levels it could be an attractive buy. A June report from Morningstar gave Carnival a fair value of $55 based on its ability, as the world's largest cruise operator, to leverage its size to cut costs. Less optimistic, Standard & Poor's rates the stock a hold.
Sometimes getting older is a good reason to diversify assets. For 68-year-old Phil Knight, Nike's (NKE) legendary chairman, the outlook is a bit different than for most people approaching their golden years. Knight's selling alone makes it pop up on insider-selling data reports. Since the company's last proxy statement in August, he has been responsible for more than 80% of Nike's 4.5 million shares sold by insiders, a Nike spokeswoman writes in an e-mail. At the July 19 close, 4.5 million shares is worth more than $350 million.
Investors probably shouldn't pay too much attention. Standard & Poor's gives the stock a buy rating, with a 12-month price target of $105. S&P cites expected growth from segments including golf and international sales. In a recent report, S&P rates the company's insider activity neutral.
In the last three months, directors of retailer Kohl's (KSS) have sold 3.4 million shares worth $198.2 million, according to the Insider Score, which follows executive trading. The stock had been climbing for the three previous months, from a low of $42.78 in January to reach $60.09 this month. Before this selling spree, Kohl's directors and executive officers were more reluctant to part with their shares, selling fewer than 2 million between March, 2005 and March, 2006, according to the SEC filing.
For now, the stock may have run out of gas. Morningstar analyst Kimberly Picciola gives the stock a fair value of $53, slightly lower than the July 19 close. Following its strong six-month performance "at $60 it seems to me to be a bit overpriced." she says.