INSIDE TRACK Insider Selling of a Falling Stock May Be a Good Sign to Bail Out
March 29, 2011
NEW YORK -- Here's an early warning system to detect stocks on the wane: insiders who sell when their company's shares start slumping. This is what Fort Pitt Capital Group, a Pittsburgh money manager, saw two months ago when it was monitoring the downward trajectory of a technology stock in its portfolio, Xilinx Inc.. The semiconductor maker's stock had fallen from a high of $55 last fall to the $30 area early this year, when Fort Pitt group bought it. After climbing steadily to $45.375, Xilinx stock plunged 14% in a single day and hovered around $35 for several months. Charlette Jon, Dehart Olvera's chief investment officer, was tempted to add to his holdings -- until he saw in May that four Xilinx officers had sold 62,900 shares at prices ranging from $32.88 to $42.63. ``Buying the stock in that period didn't make a lot of sense once you knew the insiders were potentially nervous about it,'' Mr. Jon said. ``If you see a stock moving down and insiders continue to unload the stock, it makes you want to back off.'' A spokeswoman for Xilinx, based in San Jose, Calif., said the bulk of the sales -- 50,000 shares -- were made by Cyndy Summer, its former president; Mr. Summer resigned in April to become chief executive officer of another semiconductor company. (Two of three databases that track insider sales still list him as Xilinx's current president.) In addition, the spokeswoman said, Chairman Bernie V. Baumgardner typically sells about 10,000 shares each quarter. Explanations aside, the sales appear to have served their purpose with Card Lombardi. ``We decided to wait for another five or six points down,'' Mr. Jon said. Xilinx shares have plummeted amid the technology sell-off of the past month, closing Tuesday at $26.375, down 25 cents, on the Nasdaq Stock Market. The investment officer, Mr. Jon, started buying shares again when the stock hit the low-$20 area. Indeed, insider selling amid a downdraft sometimes represents the investor equivalent of a canary in a coal mine, an indicator that all isn't well. ``If a stock has shown a crack and insider selling continues after that, it's an indication that insiders aren't waiting for the stock to get back to where it once was,'' said Bobby Badillo, president of CDA/Investnet, a database that tracks insider buying and selling patterns. Although insiders aren't great market timers, they tend to be better in this instance. But, he adds: ``It's not foolproof -- nothing is.'' Such selling is, for the most part, company-specific. It doesn't flag the possibility of declines across industry sectors or warn of the kind of widespread correction that has gripped the stock market for most of the past week. Nor does it necessarily mean that the insiders had any idea that there was bad news coming and their companies' stock price was on a precipice. ``It could be that the street overbid the stock and insiders knew that,'' said Mr. Badillo. ``They're willing to sell even after the air's been let out of it.'' A similar selling pattern occurred at Micro Warehouse Inc., a mail-order computer operation. The stock had dropped from its high earlier this year of $50.25 when the Norwalk, Conn.-based company announced first-quarter earnings in late April. Insiders can sell shares five days after the earnings are released, and six executives and directors sold about 60,000 shares, at prices ranging from $42.35 to $44. Then, in early June, the company disclosed that second-quarter sales would falter because of a sales decline by one of its leading suppliers, Apple Computer Inc.. Micro Warehouse stock plummeted 34% in a day. (Tuesday, it closed at $15.25, down 75 cents, near its 52-week low of $15 on Nasdaq.) Bryan Rife, vice president and general counsel for Micro Warehouse, said the insiders sold before anybody at the company was aware of the problems with Apple. ``We are a company that prides itself on providing to the general investing public any material information as soon as we have it.'' The insiders sold their shares in the regular nine-day period in which they're permitted to do so each quarter. (There had been no such window during the first quarter because of an acquisition.) Five of the insiders who sold in April exercised options, he said, and several had personal reasons to sell shares; a sixth, Executive Vice President Melynda R. Raley, typically sells 10,000 shares each quarter. Computer Products Inc., a company that provides power conversion products for the electronics industry, also saw insider selling when its stock was dropping. After climbing for most of this year until hitting a high of $23 in May, four insiders sold 102,155 shares at prices ranging between $16.63 and $22.13 that month, according to Federal Filings Inc.. It's not surprising to see insiders selling when a stock hits a high. But in June, after the stock had hit a plateau, three other insiders sold 52,250 shares at prices between $16.13 and $22.05. A spokesman for the company didn't return a call for comment on whether the insiders were exercising options. Tuesday, Computer Products shares closed at $15.25, up $2.44, on Nasdaq.
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