Insiders made noteworthy buys (see definition below) in four technology stocks this past week (May 21st to 25th, 2012), and sold three others. These were selected based on a review of over 1,600 separate SEC Form 4 (insider trading) filings last week, as part of our daily and weekly coverage of insider trades. 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):
Frontier Communications Corp. (FTR): FTR provides regulated and unregulated voice, data, and video services to residential, business and wholesale customers in the U.S. Last week, two insiders filed SEC Forms 4 indicating that they purchased 17,500 shares for $58,250. This is in addition to the purchase of an additional 137,200 shares by six insiders for $0.45 million just last week. Also, earlier we reported that many major institutions, including mutual fund powerhouse Fidelity Investments and Tiger cub Chase Coleman's New York-based hedge fund Tiger Global Management have been accumulating FTR shares in Q1 on the way down.
While the stock has dropped miserably over the past year, the share price has held remarkably well over the past two-three weeks, as it forms a base at the bottom while the market has been going through mayhem this entire month of May. In the latest Q1 (March) that it reported almost three weeks ago, revenues came in-line and it missed analyst earnings estimates by a penny (5 cents v/s 6 cents). Its shares currently trade at 15-16 forward P/E and 0.8 P/B compared with averages of 16.3 and 4.1 for its peers in the regional wire-line group, while earnings are projected to fall slightly from 25 cents in 2011 to 22 cents in 2013. It also pays a 11.4% dividend yield, making it among the highest dividend-paying stocks in the market.
Windstream Corp. (WIN): WIN provides communications and technology solutions in the U.S., including IP-based voice and data services, multi-protocol label switching networking, data center and managed services, hosting services, and communications systems to business and government agencies. In addition, it also provides high-speed Internet, voice, and digital television services to residential customers primarily located in rural areas. Last week, three insiders filed SEC Forms 4 indicating that they purchased 14,856 shares for $0.14 million. This is in addition to the 56,754 shares that insiders purchased just last week, and the purchase of 85,500 shares the week prior to that, so that in total insiders have purchased 0.16 million shares in the past three weeks. In comparison, insiders purchased 0.23 million shares in the past two years.
Like its peer FTR (above), WIN shares too have plunged recently, down from the $11-12 range just over two weeks ago to $9.49 close this week, a drop of over 15%. WIN reported its Q4 (March) just over two weeks ago, on May 10th, missing analyst revenue and earnings estimates (13c v/s 14c), mostly on account of a fall in wholesale revenues. Its shares currently trade at 16-17 forward P/E and 3.9 P/B compared to averages of 16.3 and 4.1 for its peers in the regional wire-line group, while earnings are projected to fall from 79c in 2011 to 53c in 2012 and then rebound to 58c in 2013. Also, the company pays a rich 10.6% dividend, among the highest in the telecom services group.
In addition to FTR and WIN, insiders also reported noteworthy buys this past week in the following two technology stocks:
- Advanced Micro Devices (AMD), that is the second largest producer of microprocessors, GPUs and chipsets in the world, in which CEO Rory Read purchased 8,000 shares for $49,600, the only insider purchase in the past year; and
- Yahoo! Inc. (YHOO), a leading global internet search engine, ecommerce and media company, in which Director Alfred Amoroso purchased 10,000 shares for $0.15 million, in comparison to 30,000 shares purchased by insiders in the past two years.
On top of these, insiders also reported noteworthy sales last week in the technology sector in:
- Citrix Systems Inc. (CTXS), that develops online application virtualization, networking and performance management software, in which General Counsel & SVP David Friedman filed SEC Form 4 indicating that he exercised options to acquire 49,451 shares and sold those and an additional 18,049 shares for $5.2 million, in comparison to 0.66 million shares sold by insiders in the past year;
- Vmware Inc. (VMW), that is a provider of virtualization-based cloud infrastructure solutions, in which CAO & Corporate Controller Robynne Sisco filed SEC Form 4 indicating that he exercised options and then sold the resulting 20,416 shares for $2.0 million, in comparison to 0.37 million shares sold by insiders in the past year; and
- DISH Network Corp. (DISH), that provides direct broadcast satellite subscription TV services nationwide, in which CFO Robert Olson filed SEC Form 4 indicating that he exercised options and sold the resulting 60,000 shares for $1.7 million, in comparison to 0.33 million shares sold by insiders in the past year.
General Discussion on Insider Trading
What is Insider Trading?
: Insider trading as defined here (and by the SEC) includes not just corporate insiders such as company executives and key employees, but also directors and large shareholders that have access to non-public information. Large shareholders are defined by the SEC for this purpose are those that having beneficial ownership of ten percent of more of the firm's equity securities (including institutional investors). Also, in the U.S., "insiders" are not just limited to corporate officials and major shareholders, but also when a corporate insider "tips" a friend about material non-public information, the duty the corporate insider owes the company is now imputed to the friend who is now in violation of a duty to the company if he or she trades on the basis of that information. The U.S. is generally viewed as having the strictest laws against illegal insider trading, and makes the most serious efforts to enforce them.
While most insider trading is legal, the term is commonly used to refer to the illegal kind when a corporate insider trades based on material non-public information that can have an effect on the company's share price. By law, insiders are prohibited from trading based on nonpublic information, but most believe that such trading does occur around the edges. The thinking goes that corporate insiders, because of their access, have the most up-to-date information on the health of their companies and the industries they operate in. Investors, as a result, can benefit from the timely knowledge of insider transactions. In fact, one University of Michigan study found that when executives bought shares in their own companies, the stocks tended to outperform the total market by 8.9% over the next 12 months. Conversely, when they sold shares, the stock underperformed by 5.4%.
Timeliness of Information: Like in the 13-D and 13-G filings for Institutions, the SEC Forms 3 and 4 on insider filings are extremely timely, and hence of greater significance, as they must be reported within two business days of the trade.
Insider Buying More Informative than Selling: As a rule, insider buys are more informative than sells. This is because insiders sell often, and they sell for a variety of reasons that may be completely unrelated to the health of the company, including, for example, to diversity their holdings or to pay for an upcoming personal expense. In contrast, insider buying is relatively uncommon, and since they have an exclusive window into their own company's performance, it is reasonable to presume that they probably have good reasons based on information at their disposal when they are risking their own assets to buy company stock.
Regular and Automatic Trades: Insider trades maybe regular trades, or they may be automatic trades made under SEC Rule 10b5-1. It is generally believed that regular insider share purchases and sales carry more predictive value as they are made voluntarily by the insiders. Conversely, trades made under SEC Rule 10b5-1, called "Automatic Buys" and "Automatic Sells", are part of a pre-determined plan or contract, and it is assumed that the plan was created before the insider had any privileged non-public information. Generally, almost all automatic trades are sells, not buys.
Furthermore, even automated trades made under 10b5-1 have some informative or predictive value due to loopholes in the rule that, for example, allow the insider to cancel the trading plan without any penalty or legal liability. So, the insider could set up a 10b5-1 trading plan before they have inside information (for example, from a quarterly report and guidance) while retaining the option to later cancel the plan based on the inside information. So, in effect, the execution of an automated trade also carries some predictive value as insiders retain the option under the existing rules to cancel their trades without penalty or legal liability.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. 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, but may initiate a long position in FTR over the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.