| Insider
Transactions
“Insider
trading” usually is a misnomer, since
it actually refers to illegal purchases or sales
by an insider possessing material, non-public information,
or one “tipped” by such an insider.
The term “insider transactions”
is more accurate when discussing the ordinary, and
legal, buys and sales that insiders make. Insider
transactions can be a source of valuable data, since
it is well established that insiders tend to buy
or sell well in advance of of major movements in
the company’s fortunes - and thus its stock
price.
While
insiders sell for many reasons, open-market stock
purchases are the ultimate insider vote in favor
of company prospects. But insiders tend to sell
when the company’s outlook is not so rosy.
Sales at a high or during a rise in the stock are
to be expected, but sales in other circumstances
are worrisome; and even more worrisome when the
stock is falling or the company’s fortunes
in question. Selling insiders are quite aware of
this dynamic, of course, so their sales in any real
volume in such circumstances evince a certain “damn
the torpedoes” attitude - they're gettin'
while the gettin' is good.
So
What's Up with Countrywide?
So
what’s up with Countrywide Financial
(CFC)? The stock hit its highest price ever
in early February 2007 and since then has dropped
about 25%, then rebounded slightly. Sales by insiders
are over $90 million in this first quarter. According
to the Wall Street Journal, about 42% of its portfolio
is in adjustable-rate mortgages and only about 7%
in subprimes, thus CFC doesn’t appear dangerously
exposed.
Yet
insiders are pounding the stock. Chairman Angelo
Mozilo has sold over 900,000 shares for over $35
million since February 5th... as the stock has been
falling. CFC insiders have never been big buyers
of the stock, as the following 2-year graph from
SecForm4.com shows rather clearly:
So
compare the buys - all $73,417 of them - to the
selling. During this 2-year time period CFC insiders
have stuffed their pockets to the tune of nearly
$600 million while buying almost nothing. Fine,
you might think, they’re selling now and not
buying, but these people are always heavy sellers
and never buy; and you would have a point.
Still,
insider sales in Q1-2007 are about double the average
rate of sales over the last two years. If Countrywide
is in a buy or even a hold, why are insiders hitting
the stock so hard since it began selling off? The
most likely answer is that they don’t see
the current stock price holding, at least in the
intermediate to long term. Insiders are like you
and me in this respect: they sell now to get a better
price when they suspect, or know, that prices later
on will be worse. So why are CFC insiders rushing
for the exits?
Put
differently, Mozilo and the other insiders know
that their heavy sales during the stock's selloff
will raise eyebrows ; it was noted by the Wall Street
Journal, no less. Yet they have if anything quickened
the pace of normal selling. They don't care what
conclusions you and I draw about CFC from their
activities; they're selling.
So Who
Cares?
FC
has for the most part been well run but basically
rode the largest housing bubble since post-World
War II (CFC certainly didn't create it). Yet insiders
have taken over $600 million out of the company
in stock-based compensation in just 2 years, not
counting salary, benefits, pension benefits, etc.
How many of the Russell 2000 companies' combined
earnings would it take to aggregate $600 million?
More than a few.
I'm
not prissy about insider selling. But covered call
writers can be well advised to take a look at insider
transactions. It oftentimes can be revealing, particularly
when the buys and sells can be viewed in graphic
form - the list of insider transaction is not helpful
because we cannot process all that information.
In Countrywide’s case, the level of insider
selling during the selloff is definitely worrisome.
Insider selling does not always prophesy an immediate
decline, as noted above, and there would seem to
be no reason for the Countrywide sales.
CFC
is testing trendline support on a weekly chart,
and I would prefer to see confirmation of support
before writing a covered call on it. The high level
of insider selling this quarter and even more since
February 5th really heightens my concern. These
concerns would not necessarily prevent me from writing
covered calls on CFC once support is confirmed;
after all, it isn't going out of business. But the
level of selling might push me to write CFC deep
in the money for more downside protection. Remember,
the first principle of covered writing is to like
the stock and be willing to own it. I suspect CFC
stock is a deteriorating asset - insider selling
confirms this.
Now,
let's take a look at a different case altogether:
AK Steel Holding Corp. (AKS). AKS
does not make money and it's P/E ratio is now 204
or 117, depending on which data you look at, compared
to an industry P/E of 17 for Industrial Metals.
Volume and the MACD line have been falling since
January while the stock has been rising - a loaded
bearish divergence pointed right at the covered
call writer. Significantly, in early February JP
Morgan downgraded AKS, in large part due to heavy
insider selling. This downgrade occurred even though
the stock recently has seen a 2-year high (where
insider selling is natural), due both to the unusually
high level of selling and the company's deteriorating
position. Without putting it just so, JPM thought
the AKS situation stinks.
Even
though AKS insiders seem never to buy their company's
stock, either, look at the acceleration in insider
selling lately in the following graph:
An
oft-told story that we know well,
they never buy, but only sell;
Will you heed the ringing bell,
the story that these tea leaves tell?
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