Insiders Buying Heavily Into These 2 Plunging Telecoms, And Other Telecom Buys And Sells

 |  Includes: CTL, FTR, RVBD, VZ, WIN
by: GuruFundPicks

Insiders made noteworthy buys (see definition below) in two telecom stocks this past week (May 29th to June 1st, 2012), and sold three other telecom and networking stocks. These, along with insider buys and sells last week in other sectors and groups (discussed in prior articles on the basic materials and energy, and healthcare sectors), were selected based on a review of over 1,200 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):

Windstream Corp. (NASDAQ:WIN) and Frontier Communications Corp. (NYSE:FTR): 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. FTR provides regulated and unregulated voice, data, and video services to residential, business and wholesale customers in the U.S.

We highlighted insider buys at these two telecoms, whose stock prices have been plunging, in our coverage last week. Specifically, we reported that insiders purchased 14,856 shares in WIN, and 17,500 shares at FTR. This past week, WIN Director Jeffery Gardner filed SEC Form 4 indicating that he purchased 36,750 shares (on top of the 4,500 shares he purchased last week) for $0.34 million, increasing his holdings to 1.49 million shares in direct and indirect holdings. In total, WIN insiders reported purchasing 0.19 million shares in May versus a total of 0.27 million in the past two years. Similarly, at FTR, Director Jeri Finard filed SEC Form 4 indicating that he purchased 50,000 shares for $0.18 million, so that in total insiders reported purchasing 0.20 million shares in May versus a total of 0.34 million shares in the past two years.

Both stocks are down significantly YTD and YOY, but FTR, in particular, has been outperforming on technical basis recently. While the rest of the market has plummeted amid the Mayhem in May, FTR shares have been consolidating nicely in a base at the bottom. In the latest Q1 (March) that it reported almost a month 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 0.9 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 23 cents in 2013. It also pays a 11.2% dividend yield, making it among the highest dividend-paying stocks in the market. FTR also has a high short interest of over 230 million shares or 23% of the float, making it a likely short squeeze candidate once it breaks out and up from the current narrow consolidation base.

WIN reported its Q4 (March) just over three 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 15-16 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 10.7% dividend, among the highest in the telecom services group.

On top of these, insiders also reported noteworthy sells this past week in the telecom and networking groups in:

  • CenturyLink (NYSE:CTL), an integrated communications company that provides a range of communications services, including voice, Internet, data and video services in the continental U.S., in which CEO of Savvis Operations James Ousley filed SEC Form 4 indicating that he sold 150,000 shares for $5.9 million, in comparison to insiders selling 0.51 million shares in the past year;
  • Verizon Communications (NYSE:VZ), a diversified communications service provider formed by the merger of Bell Atlantic and GTE, provides local exchange, network access, data, wireless and information services in the U.S. and over 150 countries, in which EVP & Chief Administration Officer Marc Reed filed SEC Form 4 indicating that he exercised options and sold the resulting 81,698 shares for $3.4 million, in comparison to 0.16 million shares sold in the past two years; and
  • Riverbed Technology Inc. (NASDAQ:RVBD), a provider of products and services that improve applications and accessibility of data over wide area networks or WANs, in which Chairman & CEO Jerry Kennelly filed SEC Form 4 indicating that he sold 133,332 shares for $2.2 million, pursuant to a 10b5-1 plan, in comparison to 2.61 million shares sold by insiders in the past year.

General Discussion on Insider Trading

The reports in this series identify last week's insider trades of noteworthy significance by sector or industry group, either by virtue of their timing, their size, the number of insiders buying or selling, based on who is buying or selling, or by the trend of their buys and sales over the long-term. The rest of the series by sector and by week can be accessed from our author page.

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 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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