Since the market swoon began in earnest in August, I have become increasingly interested in the stock market’s reaction to the news of insider buying by company executives. In many cases, I have made the plunge alongside the insiders.
Insider buying by executives at companies like First Solar Inc. (FSLR), Monster Worldwide Inc. (MWW), Molycorp (MCP), Coldwater Creek (CWTR) and Skullcandy (SKUL) have all caught my interest (I pay little attention to purchases by board directors). Swift Transportation (SWFT) is also on my radar. In almost each case, top executives made significant purchases as the stock of their respective companies traded at or near major lows. In almost each case the market has sent these stocks lower even after initially positive responses.
I assess each case in chronological order of the purchases (all charts provided by freestockcharts.com):
Molycorp CEO Mark Smith purchased 4200 of his rare earth company’s shares at $59.02. Oddly enough, he and other insiders have sold plenty of stock for much less throughout the year. I cover this activity in detail in “Unimpressed By CEOs Purchase Of Molycorp Shares.” This insider activity is quite strange, and I did not follow suit (I was already long anyway). However, I include Molycorp in the list just in case there comes a time when I can look back and make sense of it all.
In the meantime, Smith has lost 39% on these shares as fears mount of an imminent crash in rare earth prices (see “JP Morgan Reduces Upside Target On Molycorp From 100% To 25%“). While this insider purchase was not the signal of a buying opportunity, I believe the sell-off in MCP is a bit overdone and marks a great long-term investment at current prices (for more details on the case for buying into a commodities crash see “Profiting from Physical Assets in a Resource-Constrained World – Rules and Picks“). For large positions in MCP, I highly recommend owning puts as well. At current prices, a put spread could provide sufficient protection.
Click to enlarge
Return readers will recognize the Bollinger Band squeeze that preceded the current breakdown. Unfortunately, I missed this important technical pattern until now. For more details, see “Chart Review: Molycorp Update – Pressure Building” where I noticed the potential downside building in a similar squeeze in June. Also note that stochastics are now oversold and MCP has consistently bounced higher from such setups.
Truckload motor carrier SWFT had an underwhelming IPO December 16, 2010. It opened at an $11 IPO price which was below the expected $13-15 price range. The stock drifted as high as $15 by the following spring, but since then the stock has lost 57%.
Six different executives purchased 288K shares at a total cost of $2.0M after the stock lost 29% in three days. Founder and CEO Jerry Moyes led the way with 280K, or 97%, of all the purchased shares. SWFT quickly recovered its prior losses but is now sitting exactly where it was before the purchases began, at all-time lows.
I have not yet made any purchases of SWFT shares as I am trying to pace my trades. If the general stock market continues to sell-off, a stock like SWFT will simply continue making fresh all-time lows. The trucking business is a brutal business with slim margins and stiff competition (for an example from movers of household goods see “Movers of Household Goods Feel the Pressure“). I'm being patient here, but SWFT is at the top of my wish list.
Click to enlarge
I have made the case for FSLR several times (click here for an archive of articles). The last piece – “First Solar Executives Try Again To Signal A Bottom For Company Shares” – flagged large stock purchases by five executives totaling 5,500 shares. The stock got a small spark on the news but that ended at $100/share at the end of August.
FSLR has fallen 30% since then to 4 1/2 year lows. Not only did FSLR follow the general stock market down but also solar stocks as a group have essentially collapsed as fears mount about the ability of global markets and governments to support the industry. Moreover, First Solar recently announced its Topaz Solar Farm will fail to meet the deadline required to qualify for loan guarantees from the Department of Energy. All of FSLR’s insiders are quickly underwater on their purchases.
Click to enlarge
The chart above shows a stock trying to bottom (yes, again). The bullish features in the chart: high volume selling followed by high volume buying that lifts the stock off major lows; and oversold stochastics. Given the strong downtrend on the stock, the burden of proof firmly rests on the buyers.
On August 30, Executive Vice President Timothy T. Yates, Chief Financial Officer James M. Langrock and President and Chief Executive Officer Sal Iannuzzi spent $713K on 87K shares in their company. MWW soared after this news and closed the day with an incredible 21% gain. At this point in the general market sell-off, I thought such a move would stand the test of time. Instead, four straight days of selling erased all these gains. MWW is now selling BELOW August 30′s open, and, to me, it represents an incredible investment opportunity.
Monster last reported earnings July 28. The company issued in-line guidance for earnings and revenue for fiscal year (FY) 2011. The stock still sold off 9% that day on to a total 41% loss as of last Friday. The stock now trades for 25% below book value and a 10.5 forward P/E. If I had not already bought just ahead of the news of the insider purchases (total luck), I would definitely buy here. I am expecting the 2011 lows to hold, but if not, I am looking to the March 2009 lows (20% away) as a spot to double down on this insider play. At some point in the not-too-distant future, the job market will become much friendlier to Monster’s business.
Click to enlarge
Clothing retailer Coldwater Creek had been left for dead after making new all-time lows September 2. That is where CEO Dennis Pence went to work. From September 6 through September 15, 2011, Pence purchased company stock for an amazing eight straight trading days. He spent $1.4M accumulating 1.2M shares.
CWTR was already on my radar because I still vividly remember how many stocks left for dead in early 2009 soared to return double, triple and more within months. I bought CWTR almost instinctively when it showed some life on September 6, but I sold two days later thinking a 15% gain was as good as I could expect under the circumstances. I did not even realize that the CEO had purchased shares until the two days later as the stock continued to rally. Given how the market has rewarded inside buyers with losses, I decided to try some patience. I felt fortunate to buy back in as CWTR retested its 50-day moving average (DMA).
Click to enlarge
Even with the large vote of confidence from the CEO, CWTR is still a speculative play. The company is losing revenues, bleeding cash, and is in the second phase of a long-term strategic operating plan to turn around the company’s fortunes. Clearly, the CEO believes in this plan’s ultimate success. I am willing to come along for the ride, and I will add to my holdings if CWTR trades lower.
Skullcandy (SKUL), a stylish developer and distributor of headphones and other audio accessories, made its market debut on July 20, 2011, opening at $23. The IPO priced at $20 which was above the $17-19 expected range. The general stock market’s sell-off began in earnest one week later. So, no surprise SKUL has sold off ever since its IPO. The company did not help its case by providing guidance slightly below consensus at its first earnings report on August 16.
Mitch Edwards, the CFO and general counsel, spent $133K buying 10K shares. This is an unusual move in that insiders so rarely buy shares of a company so soon after an IPO. They typically already own plenty of shares at very low exercise prices.
Regardless, as soon as I saw the initial news of the insider purchase, I bought some shares. After an initial pullback, SKUL finally closed the day up 11.5%. After a second up day, I decided to just sell given the context of all the post-insider-buying pullbacks I have described above. Sure enough, SKUL has swooned along with the market, and I took the opportunity to plunge right back in on Friday.
Click to enlarge
I believe this diverse set of insider purchases is an encouraging sign in an otherwise sobering market. These are not all the insider buys from the past several months, but they have caught my interest. When added to all the stock buybacks that companies continue to announce, I have to believe that the grass is very green on the other side of whatever economic calamity still lies ahead.
Additional disclosure: I also own puts on MCP