When it comes to the investments they currently hold - as well as those that they wish to perhaps invest in - many investors smartly look at what the management teams do and say. As such, these investors typically follow any trends in insider trading within their investment holdings, looking to see whether key members of a company's management team have recently bought or sold shares of his / her company. Since any such insider activity must get filed with the SEC, one can likely see why this is an important metric that investors follow closely: rapid insider buying sends strong signals that management sees good times ahead, rapid insider selling signals the opposite.
Yet insider selling can certainly be misleading at times if investors aren't careful. For instance, with Cirrus Logic (NASDAQ:CRUS), bears are jumping on some high-level trades revealed during this quarter from SEC Form 4 filings. Unfortunately for bears, much of this amounts to simple option call buying and selling, which any true investor will understand. When an option call is about to expire and it's greatly in-the-money, who can fault the sound investor for executing accordingly and taking sure profits?
For our purposes here, let's take a look at the past calendar year to get a better gauge on what moves have been made to date.
Crunching the Numbers
Jason P. Rhode, President and CEO
At the outset of the year, Cirrus Logic's CEO owned 23,812 shares as disclosed by InsiderTrading.org. Rhode then exercised an option to buy 7,500 shares on July 30, 2013, for a price of $6.97, increasing his total share count to 31,312. Considering Cirrus Logic submitted a Form 4 SEC Filing back on October 6, 2010, that then disclosed restricted stock compensation for Rhode of 37,500 shares, due three years from that date, naturally, Rhode's share count increased this past October without any formal purchases.
However, given Cirrus Logic's stock price was hovering in the $23 range at the time, Rhode sold 14,182 shares via a qualifying disposition on the same date of acquisition. As such, by the time Rhode began making additional trades, his share count stood at 54,630.
At the end of the year, Rhode had exercised two additional options contracts due to him, turning around and selling those shares immediately for a handsome profit, and did no additional insider selling. On the year, Rhode had increased his share count by an astounding 129%. While Rhode certainly unloaded his fair share of stock during 2013, any articles citing his insider selling failed to call out that almost all of his selling involved option calls that were in-the-money.
Thurman K. Case, CFO and VP of Finance and Treasurer
Doing the same exercise with Cirrus Logic's main money man, investors certainly have additional reason to breathe a sigh of relief. During the past year, Case owned 6,880 shares of his company at the outset of 2013. Due to a flurry of options activity on February 8, 2013, Case did a lot of insider selling, dumping all of his options purchased, a total of 27,159 shares. Certainly this represents a huge percentage of potential stock owned by Case, but what more would an investor expect from a CFO whose strike price was $3.40?
Thanks to a similar restricted stock award as aforementioned with Rhode, by the end of the year, Case owned 9,122 shares of Cirrus Logic, boosting his share count by 33%. Yet again, another key player at Cirrus Logic increased his share count by a significant margin. Considering this represents a significant amount of his compensation - base salary for Case sits at about $300,000 - Case's steadfast belief in his company will continue to thrive.
Scott Anderson, Senior VP and General Manager, Mixed-Signal Audio Division
Without going into as much detail, based upon the same data from InsiderTrading.org, Anderson began 2013 with 20,000 shares of Cirrus Logic, and following much of the same analysis as above, his position increased nearly 56% to 31,195 shares at the start of 2014. Investors should note that this increase resulted from restricted stock awards.
Granted, again, this large percentage increase wasn't necessarily due to insider buying - he too had huge swathes of options contracts that he profited handsomely off of in both February and November of last year - good investors understand taking profits like those when you're in-the-money.
Jo-Dee M. Benson, VP and Chief Culture Officer
Interestingly, Benson only exercised stock options over the course of 2013. As such, she earned nearly $1.5-million before the first month of 2013 had finished.
Given Forbes reports that Benson held 8,628 shares of Cirrus Logic at the end of 2013, she likely received similar restricted stock awards that came due in October like the rest of the executives above. As such, calculating a percentage increase from the start of the year yields little insight here. Nonetheless, she does hold a significant amount of stock and appears ready to hold onto it considering several months have passed already with no activity.
Randy Carlson, VP of Supply Chain Management
Similar to Benson, Carlson appears to have liquidated himself of any current ownership in Cirrus Logic. Without additional information, he appears to be an anomaly. Perhaps he believes in diversifying away from the company that he works for, but either way, Carlson divested himself of 10,897 shares on November 5, 2013.
Tom Stein, VP and General Manager, Energy, Exploration and Lighting Division
Stein represents our most recent insider activity at Cirrus Logic. He currently owns 8,247 shares of Cirrus Logic after exercising several options contracts over the course of 2013. Considering he, too, began 2013 without any shares purchased, Stein appears to be exercising in-the-money option contracts as they expire, holding onto restricted stock awarded to him in October of last year.
Tim Turk, VP of Worldwide Sales
Lastly, Turk exercised nine options contracts last year to pick up a considerable amount of cash along the way, to the tune of just over $1 million. Considering he also had an additional insider sale of 9,081 shares on October 29, 2013, it appears he too liquidated himself of company stock awarded to him earlier that month.
Making the Call
So, in all, the past year to date for Cirrus Logic amounted to 49 insider sales and 46 buys, which skews slightly towards negative sentiment as about 52% of all insider activity was selling. However, as the above analysis proves, the majority of all activity was due to options contracts expiring in the money. In other words, the insider purchase to sale ratio is nearly 1:1.
When one considers that insider selling comprised almost 83% of insider activity at competitor Maxim Integrated Products (MXIM) - a company Cirrus Logic bears are quick to point out took over the audio amplifier socket in Apple's (NASDAQ:AAPL) iPad Air - it appears stronger insider sentiment resides with Cirrus Logic. This has been previously alluded to, and it doesn't appear that much has changed in terms of the underlying fundamentals to Cirrus Logic's story. In fact, thanks to Apple's deal with China Mobile (NYSE:CHL), Cirrus Logic's fundamentals have increased, if anything. Again, this has already been written on, too.
As most investors in Cirrus Logic will likely conclude, it appears the winds are favorable for the start of 2014. With strong support from upper-level management in terms of insider ownership, along with an increase in guidance issued during Cirrus Logic's last earnings report - likely thanks to increasing positivity surrounding Cirrus Logic's largest customer, Apple - this recent pullback in Cirrus Logic's stock looks to be short-lived. Considering Cirrus Logic's P/E currently sits below 10, there's still time for the value investor to hop aboard this rising star and take a well-calculated risk to profits.