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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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