Margin Calls: 2 Stocks With Forced Insider Sales

Includes: BPZ, CHK, LINC
by: The Keating Letter

With all of the volatility over the past few weeks investors can often find opportunities in stocks where there is forced selling. An extreme example of this was when Chesapeake Energy’s (NYSE:CHK) CEO Aubrey McClendon was forced to sell substantially all of his 33.4 million company shares because of a margin call in the fall of 2008. Nearly all of his $3 billion fortune was tied up in Chesapeake shares and he was levered up.

Yesterday my Twitter feed gave me two potential forced sale opportunities thanks to The first was from Lincoln Educational Services (NASDAQ:LINC). On August 4 CFO Cesar Ribeiro was forced to sell 7,396 shares at $12.45 and 6,972 at $12.38. The total sale was $178,394. Ribeiro then bought back 11,000 shares on August 8 at prices between $10.70 and $11. He owns 119,590 shares. While the stock’s average volume is just under 400,000 shares per day, it would be worthwhile to watch here to see if Ribeiro gets forced out again with all of this volatility. The stock fell 15% on August 8.

The second margin call was from BPZ Resources (NYSE:BPZ). Gray Gordon is a director for the company. He was forced to sell 539,500 shares on August 9 because of a margin call. His average sale price was $2.54. He still owns more than 4.2 million shares. On August 9 BPZ’s stock fell 14% and at one point was down almost 31% on the day. Average volume is about 2.3 million shares per day.

When there is a margin call and the insider owns significant shares, shares have a better chance of falling greater than they otherwise would. This would be an opportunity to pick up the shares for a short term period until the price normalizes. The market can be extremely inefficient in the short term, and this can be one reason why.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.