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If the CEO is selling, should you?
Not necessarily. Some corporate honchos cash out for their own reasons. Then again, we found five whose track records of astute sales seem to be a sure sell signal.
By Michael Brush
With the stock market up well over 30% so far this year, insiders have been cashing out more vigorously than at any time in the past two decades.
The top five sellers of 2003 already have rung the register for gains worth more than five times the gross domestic product of Greenland -- selling $5.6 billion worth of stock this year.
Four of the top five sellers took advantage of this years rise to sell far more stock than they ever did during the prior market slump. To wit:
- Michael Dell, a perennial seller of shares of his Dell (DELL, news, msgs), offloaded a massive $1 billion worth of his stock as of this week, according to Thomson Financial, which helped compile the list of top sellers. Thats almost four times his annual average of $271 million in the past two years.
- Microsoft (MSFT, news, msgs) CEO Steve Ballmer unloaded a hefty $1.45 billion, raising eyebrows among tech investors because that was his first sale in over a decade. (Microsoft is the publisher of MSN Money.)
- Mark Smith, the co-founder and chairman of telecom equipment maker Adtran (ADTN, news, msgs), didnt sell a pennys worth of his shares in 2001 and 2002, when his stock traded in the $20-$30 range. But as it moved through $40 earlier this year, he began cashing in. Then, he sold a huge chunk in November in the upper $60 range. Grand total so far: $460 million.
- Meantime, Ted Turner vented his frustration with the top managers at Time Warner (TWX, news, msgs), who made the mistake of merging with America Online (AOL) back in the peak of the stock market bubble. Turner sold $1 billion worth of Time Warner shares this year. He had cashed out only a tenth of that, or $103 million, in the prior two years.
- Perhaps not surprisingly, the person with possibly the biggest exposure to any single stock -- Bill Gates, chairman of Microsoft -- topped the list with the largest insider sales. He sold a whopping $1.67 billion.
Total proceeds for these five biggest sellers of 2003: A cool $5.6 billion.
Should these sales worry investors?
If the massive selling by insiders overall this year has you troubled, you may be on to something. All the major services that track insider action say its an ominous sign.
But that doesn't necessarily mean you should be worried about the future of the stocks sold by our top five sellers. Believe it or not, the massive sales by these five are likely meaningless, says analyst Kevin Schwenger of Thomson Financial.
The reason? All these insiders have a bad record for timing the sales of their stock, according to Thomson Financials vast database, which lets clients track the records of insiders in detail.
This isnt surprising. After all, these insiders have some of the biggest exposure to single stocks out there. Theyre likely selling to diversify their market exposure, not necessarily because they see bad things ahead for their companies.
Take Adtrans Mark Smith, for example. He has sold shares of his company's stock six times in his life. And, on average, he would have earned 46% more had he waited just six months to make those sales.
Selling by Ballmer has proved to be even less of a reliable signal. Microsoft shares advanced 56% on average in the six months following his prior seven sales. Dell shares have gone up 32% in six months following the 60 sales by its founder.
Of all the top five sellers, Turner and Gates are the most astute at timing sales, when measured in six-month-return intervals. They left only 6% and 15% on the table following their many sales over the years -- 16 for Turner and 58 for Gates.
To tease the most useful market intelligence out of this years big insider selling, you have to look at the moves by top execs with good records for timing their exits. To do this, we asked Thomson to dig up the biggest sales by insiders whose lifetime sales were followed by declines of 10% or more within six months.
The year's biggest paydays
Heres a closer look at the 10 key insider sellers. (Insiders are typically company officers or directors.) The first five represent the year's biggest sales. The next five have some of the best records of any stockholders for getting out when the getting is good (in other words, they're worth following).
Microsoft: Microsoft CEO Ballmer turned heads in the tech world last May and June, when he got rid of more than 60 million shares of "Mister Softie." The move caught investor attention because -- unlike Gates and co-founder Paul Allen, who have cut their holdings in half since 1994 through routine sales -- Ballmer hadnt sold since 1991.
At the time of the sales, Ballmer stated he was still "excited" about the outlook for Microsofts products. And insider analysts pointed out that he still held a gigantic position in the company -- 431 million shares worth about $11.5 billion. Nevertheless, Microsoft shares have languished this year with a 2% gain, while the Nasdaq 100 index ($NDX.X) has advanced 43%.
That disconnect has some money managers now thinking that Microsoft makes sense as a value play. With a price-to-earnings ratio of 26 times trailing earnings, Microsofts P/E is less than half of that for the Nasdaq 100, which is 64. Indeed, recent selling by Gates could confirm this view. Among the top five sellers this year, he was the only one who sold considerably less this year than during the market slump. Hes sold $1.67 billion worth of stock so far in 2003, compared with an average of $2.34 billion worth of stock in 2001 and 2002. Morningstar stock analyst Joseph Beaulieu recommends buying the stock below $25.
Time Warner: If youve ever held a losing position too long, only to sell just ahead of a big advance, take comfort. You share the company of one of the smartest and richest entrepreneurs in the world. For years, Cable News Network (CNN) founder Ted Turner publicly lamented his 1996 decision to merge with Time Warner, a move that put a huge amount of Time Warner stock into his hands. In 2001, after it became clear Time Warners merger with AOL was going to be trouble, he described the decision to merge CNN and Time Warner as "the biggest mistake I ever made."
Unfortunately, he waited until the stock tumbled to $13 last May to sell most of the $1.1 billion position in Time Warner stock he unloaded this year. Since then, the stock has risen 33%. Given Turners poor record of timing sales, his moves this year probably aren't a negative sign for the stock. Still, because of Time Warners big debt load and ongoing accounting investigations, Morningstar analyst Jonathan Schrader doesnt recommend buying the stock above $15.
Dell: Despite his routine of dumping lots of stock every quarter, one thing is troubling about Michael Dells sales this year. His $1 billion cash-out was almost four times the size of what he sold on average in 2001 and 2002. A Dell spokesman insists the selling was all part of Dells routine money management. And Morningstar stock analyst Rod Bare isnt troubled by the sales, either. Instead, Bare says, Dells strategy of applying its low-cost direct-sales model to international markets and new product lines -- like consumer electronics, servers and storage devices -- will help the company double sales by 2007, when revenue may reach $60 billion. Bare thinks Dell is a buy below $27.
Adtran: Adtran co-founder and Chairman Mark Smith made headlines in Alabama this fall when the executive of the Huntsville, Ala., company sold a sizable chunk -- nearly a half a billion dollars' worth -- of his companys stock. Smith tried to reassure investors, saying the sales were done to diversify his stock exposure and pointing out that he still holds about 10% of the company. Indeed, the stock always has gone up, on average, after he has sold. Based on the potential for new broadband access equipment the company is rolling out, Adams, Harkness & Hill analyst Joanna Makris thinks Adtran should outperform its peers next year.
The year's most predictive paydays
Abercrombie & Fitch (ANF, news, msgs): Michael Jeffries, the chairman and CEO of this retailer that was once all the rage among teens, has been dumping shares of his companys stock all year. Total to date: $27.5 million. Whats troubling for investors is that, on average, the stock drops by 18% in the six months after he sells, according to Thomson Financial.
Prudential Equity Groups Stacy Pak worries that the companys juicy profit margins may come under pressure as it is forced to cut prices to improve sales -- just as Abercrombie reaches the end of the line on cost cutting. "We simply dont see a catalyst for earnings growth," says A.G. Edwards & Sons analyst Robert Buchanan.
The stock jumped 62% from the end of 2002 until its peak at the end of April. Its down 28% since.
Humana (HUM, news, msgs): Humana Chairman David Jones Sr. has sold $9.5 million worth of his companys stock this year -- an ominous sign, since it sinks 12% on average in the half year after he sells, according to Thomson. Humana, a health benefits company, has solid partnerships with several branches of the government. But growth in this segment is slow. Whats worse, its not clear how soon Humanas bid to branch out into commercial lines of business will generate healthy profits, says Morningstar.
The stock, however, is up 128% so far this year.
WebEx Communications (WEBX, news, msgs): Back in August, WebEx CEO Subrah Lyar got rid of most of the $7.8 million in shares of his own company that hes sold so far this year. That could be bad news for investors, because the shares typically fall 30% within six months after he sells.
WebEx is the leader in Internet-based conferencing services. But Standard & Poor's analyst Mark Basham is still telling investors to avoid the shares. He thinks WebEx may have to cut prices too much to compete against big rivals like Microsoft, which offers a Web-based conferencing service called Live Meeting.
WebEx up 18.2% for the year, but is down 30% from Oct. 16.
McData (MCDTA, news, msgs): John McDonnell, chairman of storage device maker McData, sold $7.9 million worth of his companys stock this year. Hes one of the more accurate sellers on our list. Typically the stock falls 29% six months after he sells. McData had to cut prices earlier this fall to keep one of its major customers, EMC Corp. (EMC, news, msgs), and it probably will have to extend similar terms to other big customers such as IBM (IBM, news, msgs) and Hitachi Data Systems, a subsidiary of Hitachi (HIT, news, msgs).
"Although the strength of McDatas franchise remains, we would prefer to remain on the sidelines for the time being," says Goldman Sachs analyst Brenden Smith. Because of downward pressure on prices from competitors, Standard & Poors analyst Richard Stice has a $7 price target on the stock, below recent levels of $8.75. The stock ended 2002 at $7.10 and peaked at $15.67 in July.
Gymboree (GYMB, news, msgs): Stuart Moldaw, chairman emeritus of Gymboree, sold $7 million worth of his companys stock this year, which may not be a good sign because typically the stock declines 29% in the six months after he sells.
Buckingham Research Group analyst John Zolidis has a $10 price target for the stock, well below recent levels of $16. He thinks the stores strategy of launching several new lines at once is risky. And he thinks recent aggressive markdowns suggest the company may have trouble reaching sales targets. The stock is about even on the year.
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