Many investors choose to follow the actions of insiders when determining what to do with their investments. After all, who knows a company better than its board of directors and management teams? But, there are some flaws with this approach, especially in regard to insider selling. Many of those who follow insider transactions still carry with them the memory of Enron, where top executives cashed out by the millions, but left employees and ordinary investors with nothing.
For many, insider selling is equated with a lack of confidence. That, however, is impossible to prove, and can only be proven after an event such as a poor earnings report, a failed drug trial, or regulatory action. Insiders can sell for a variety of reasons. They may need money to buy a new house, pay for their children's education, or take an expensive vacation. The SEC's Form 4, which details insider transactions, has no box for explaining why a company executive or director is selling stock (or cashing in options). And aside from a few exceptions, (such as the Delta CEO Richard Anderson's decision to sell 5,000 shares and donate the proceeds to relief efforts for Hurricane Sandy), company executives rarely disclose exactly why they are selling.
Insider buying, however, is different. While there may be many reasons for executives to sell shares, there is only one reason to buy: they expect the stock to go higher. And in recent weeks, the management team and board of directors of GSV Capital (GSVC) have been on a buying spree, and we believe that investors should follow them into the stock.
For readers unfamiliar with GSV Capital, it is a publicly traded investment firm that specializes in investing in private companies (it acquires shares of private companies via either secondary markets or by participating directly in funding rounds). Key holdings include Dropbox and Twitter, as well as Facebook (FB), Groupon (GRPN), and Zynga (ZNGA). GSV Capital went public in 2011, but gained prominence when it disclosed that it had acquired a stake in Facebook. Given the excitement surrounding Facebook's upcoming IPO, shares of GSV Capital soared to over $20. But, once Facebook went public, and began its slide, shares of GSV Capital slid as well. Facebook's post-IPO performance, as well as weak performance from both Zynga and Groupon, drove the stock lower and lower, and the company's 52-week low sits at $6.84, over 67% below its 52-week high (shares of GSV Capital closed at $8.57 on December 12, 2012).
We have written about GSV Capital before, arguing that the company's shares are undervalued. While it is true that shares rose too far due to Facebook's IPO, we believe that shares have fallen too far in the months after. As of the end of the third quarter, Facebook accounted for just 2.65% of the company's net assets (Zynga accounted for 0.58% of net assets, and Groupon accounted for 0.15% of net assets). Based on its current net asset value per share of $13.45, GSV Capital trades at a 36.28% discount to NAV, a level we view as unreasonable. While it is true that GSV Capital's NAV is difficult to model, the company does not simply assign it a value based on whatever its management team thinks. In its latest 10-Q filing, GSV Capital devotes a good deal of time discussing how it values its investment portfolio. The company states that,
"In connection with that determination [the valuing of portfolio companies], portfolio company valuations are prepared using the most currently available data. As appropriate, we obtain updates on each portfolio company's financial performance, including information such as economic and industry trends, new product development, and other operational issues. In making our good faith determination of the fair value of investments, we consider valuation methodologies consistent with industry practice, including but not limited to (I) publicly available information regarding the valuation of the securities based on recent sales in comparable transactions of private companies, (ii) when management believes there are comparable companies that are publicly traded, a review of these publicly traded companies and applicable market multiples of their equity securities and, (III) an income approach that estimates value based on the expectation of future cash flows that an asset or business will generate. We engage independent valuation firms to perform valuations of our investments that are not publicly traded or for which there are no readily available market quotations. We also engage independent valuation firms to perform valuations of any securities that trade on private secondary markets, but are not otherwise publicly traded, where there is a lack of appreciable trading or a wide disparity in recently reported trades. We consider the independent valuations, among other factors, in making our fair value determinations. [Emphasis added]"
GSV Capital engages independent firms to assist it in valuing its portfolio, and while its NAV may be an estimate, it is based on a wide array of inputs, and is not simply thought up by GSV Capital's management team to suit their needs. And in our view, a discount of over 36% to NAV is unreasonable. GSV Capital may have been unduly rewarded for its investment in Facebook prior to its IPO, but now it is being unduly punished. And the company's insiders seem to agree with that view.
Tracking Insider Buying
Over the past several weeks, GSV Capital's directors and management team have acquired thousands of shares, and we detail their transactions below.
GSV Capital Insider Purchases
Executive Vice President
President, CEO, and Chairman
Over the past month, GSV Capital insiders have bought over 19,000 shares of the company's stock, and there is only one explanation for why they have done so: they expect the stock to rise (CFO Stephen Bard has not participated in this latest round of buying, but he does hold 31,667 shares directly, and his family holds another 29,869 shares). CEO Michael Moe has spoken at length on the company's earnings calls that the company views its stock as undervalued, and that it feels this kind of discount to NAV is unwarranted. We agree with that assessment. Here, critics may ask why Michael Moe owns less than 13,000 shares of the company. If GSV Capital is so undervalued, why doesn't its CEO own tens of thousands (or even hundreds of thousands) of shares? In our view, this line of thinking is flawed.
Using such logic, a CEO should own every available share. Why stop at just 100,000 shares? Why not own 10 million of GSV Capital's 19,320,100 shares? Michael Moe owns a stake in his company, and in recent weeks, he has upped that stake. He is connected to GSV Capital in other ways, however. The company's portfolio is managed by GSV Asset Management, which Michael Moe co-founded in 2010. Furthermore, Michael Moe brings a great deal of experience to GSV Capital, something that we feel is more important than how many shares he owns. Before founding GSV Asset Management, he was chairman and CEO of ThinkEquity Partners, and before that served as head of Global Growth Research at Merrill Lynch.
In our view, GSV Capital's directors and management team are sending a clear signal that the company's shares are undervalued. They have bought thousands of shares over the past few weeks, and there have been no insider sales over the past month. In fact, since GSV Capital filed its first Form 4 in May 2011, not a single insider has sold any of their stock in the company. How many companies can claim not to have a single insider sale in over 18 months?
Upcoming Catalysts & Conclusions
Over the coming months, GSV Capital will see several catalysts that could cause its share price to rise. Violin Memory, which accounts for 5.7% of GSV Capital's net assets, is set to go public, and according to Bloomberg's sources, it filed to go public under the JOBS Act, which will let the company keep its plans confidential until 3 weeks before its "roadshow." The valuation for Violin Memory is nearing $2 billion, according to those sources, more than double the $800 million valuation it received in its last funding round. And speculation regarding the IPO of Twitter, which comprises 13.89% of GSV Capital's net assets, is only set to grow as 2013 nears and the company continues its work on monetizing its growing user base. Should there be concrete news regarding Twitter's IPO timeline, we expect that shares of GSV Capital will benefit.
As we stated in our last article on GSV Capital, its shares are both undervalued and unloved. The company's stock has been "tainted" by its exposure to Facebook, Groupon, and Zynga, even though these companies make up just a small percentage of its overall investment portfolio. Over the past few trading days, we have joined GSV Capital's board members and management team in adding to our position in the company, and we believe that investors who add to or initiate positions in GSV Capital at these levels will, in time, be rewarded for their conviction.