Analyzing Monday's Noteworthy Insider Trades

Includes: APC, ATVI, HST, SD, ZNGA
by: GuruFundPicks

We present here one noteworthy buy and four noteworthy sells from Monday's (March 19th, 2012) SEC Form 4 (insider trading) filings, as part of our daily and weekly coverage of insider trades. These were selected by a review of over 370 separate SEC Form 4 transactions filed by insiders on Monday. The filings are noteworthy based on the dollar amount sold, the number of insiders buying or selling, and based on whether the overall buying or selling represents a strong pick-up based on historical buying and selling in the stock (for more info on how to interpret insider trades, please refer to the end of this article):

Zynga Inc (NASDAQ:ZNGA): ZNGA develops, markets and operates online social games such as CityVille, FarmVille, FrontierVille and others, making them available worldwide on various platforms, including Facebook, MySpace and Yahoo, as well as the iPad, iPhone and Android devices. On Monday, COO John Schappert filed SEC Form 4 indicating that he converted 716,332 shares of Class B common stock into an equal number of shares of Class A common stock, and then sold 330,846 of the resulting Class A shares for $4.3 million to cover tax withholding requirements, ending with 385,486 shares after the sale.

This is the first recorded insider transaction in ZNGA that came public at $10 last December, selling 100 million shares or about 14% of its total outstanding shares in its IPO. ZNGA's post-IPO share lockup period expires on May 28th, when almost all of its outstanding shares would be available for trading. The company last Wednesday filed a registration statement for a proposed secondary offering, speculated to be in the $150-$250 million range, for insiders to sell stock before the lockup expiration, thereby possibly avoiding increased downward pressure on the stock from heavy insider selling on the open market once the lock-up expires.

ZNGA shares were weak in the weeks following the IPO, but have ratcheted up recently as we get close to an IPO of Facebook (NASDAQ:FB) at a valuation of near $100 billion. The company accounts for 12% of Facebook revenue, and the argument among bulls has been that the market is not valuing it rich enough in comparison to Facebook. We believe that with the recent sharp rise in ZNGA shares, the risk is to the downside; although the valuation could be justified based on comparison to FB valuation, buying based on such comparisons as many learnt in the late 90s and the early part of the last decade is dangerous. We believe that it is actually more likely that both FB and ZNGA are overvalued based on fundamentals, and that the bubble could easily be deflated after the initial hype from the Facebook IPO subsides.

Host Hotel and Resorts Inc. (NYSE:HST): HOST is a REIT that owns 110 full-service upper-upscale and luxury hotels across 26 states, D.C., Canada, Mexico and Chile. On Monday, CEO Edward Walter filed SEC Form 4 indicating that he sold 50,000 shares for $0.8 million, ending with 1.45 million shares in direct and indirect holdings, including holdings of restricted stock (not including derivative securities). In comparison, insiders sold 85,000 shares in the past year, including the sale of 35,000 shares that we reported on earlier this month. HST reported an in-line Q4 last month, and it trades at forward price to funds from operations (P/FFO) ratio of 14.9 compared to the average of 12.7 for its peers in the REIT Equity Trust group. Also, it has a dividend yield of 1.3% compared to the 4.2% average for the group.

P/FFO is a more appropriate measure of value, commonly used in the REIT group, as it adds back in depreciation expenses that are typically taken out in calculating net income and earnings. This is because real estate, unlike fixed PP&E costs in the case of other groups, rarely loses value over the long-term, and in fact, most often appreciates over the long-term. So, in this case spreading out the investment cost in PP&E (in this case, mostly real estate) charges over the long-term makes little sense as is done in calculating net income; hence, depreciation is added back in and the resulting FFO is a more appropriate measure of the cash flows than is earnings.

Andarko Petroleum Corp. (NYSE:APC): APC is one of the world's largest independent oil and gas exploration and production companies, with a majority of its reserves located in the U.S., in the mid-continent in KY, OK and TX, offshore in the Gulf of Mexico, and in AK. On Monday, Director Charles Goodyear filed SEC Form 4 indicating that he purchased 10,000 shares for $0.8 million, increasing his holdings to 10,729 shares after the purchase. In comparison, insiders purchased 13,000 shares in the past year.

APC shares received favorable news recently on a resolution of its long-standing dispute with Algeria and its state oil company Sonatrach, under which APC will receive $1.8 billion worth of crude over 12 months once the deal is finalized. APC shares currently trade within striking range of all-time highs at 16-17 forward P/E and 2.3 P/B compared to averages of 18.1 and 5.2 for its peers in the U.S. oil & gas exploration & production group, while earnings are projected to increase from $3.38 in 2011 to $5.05 in 2013 at an annual growth rate of 22.2%.

Activision Blizzard Inc. (NASDAQ:ATVI): ATVI publishes interactive entertainment software and peripheral products for consoles, hand-held devices and PCs. On Monday, Chief Human Resources Officer Ann Weiser filed SEC Form 4 indicating that she exercised options and sold the resulting 400,000 shares for $4.9 million, ending with 30,208 shares and 100,000 restricted stock units after the sale. In comparison, corporate insiders sold 3.5 million shares in the past year (not including a 35 million share sale by Vivendi last November).

ATVI reported a good Q4 last month, beating revenue and earnings estimates. However, shares continue trading at discount levels at a current 13.5 P/E and 1.4 P/B, compared to averages of 14.3 and 2.0 for its peers in the toys, games and hobby group, probably on account of the uncertainty in terms of how the gaming sector will evolve in the face of threat from mobile and social gaming.

Sandridge Energy Inc. (NYSE:SD): SD is an OK-based independent oil and natural gas company, with their primary areas of focus being West Texas, the Cotton Valley Trend in East Texas and the Gulf Coast. On Monday, EVP Rodney Johnson filed SEC Form 4 indicating that he sold 39,053 shares for $0.33 million, ending with 0.30 million shares after the sale. In comparison, corporate insiders sold under 60,000 shares in the past year. SD in its most recent Q4 reported last month beat analyst revenue and earnings estimates. Its shares, however, trended lower after the report and currently trade at 19-20 forward P/E and 2.1 P/B compared to averages of 17.8 and 5.3 for its peers in the U.S. oil & gas exploration & production group.

Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.

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

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