Insiders made noteworthy buys (see definition below) in three tech sector stocks this past week (May 29th to June 1st, 2012), and sold four others. 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):
Pandora Media Inc. (P): Pandora is a premier provider of Internet radio in the U.S., offering listeners streaming music based on analysis of user listening behavior. Its services are offered on traditional computers and on smart phones such as Android phones, BlackBerry's and the iPhone. On Friday, Director Barry McCarthy filed SEC Form 4 indicating that he purchased 45,000 shares for $0.47 million, increasing his holdings to 0.50 million shares in direct and 0.13 million shares in indirect holdings. In comparison, insiders purchased 0.13 million shares in the past year.
Pandora reported its Q1 (April) the Wednesday before last week, on May 23rd, in which it beat analyst revenue and earnings estimates (9c Loss v/s 17c Ls), while also guiding up its projections for FY 2013 revenue and earnings. Metrics were positive across the board, with listener hours and active hours up, as well as the company capturing an increasing slice of the U.S. radio listening market. With a short interest of about 18 million or 30% of the float, the stock reacted well to the positive report, gapping up the next morning. Broker reaction was almost uniformly positive, with JMP Securities raising its price target to $16, well above current $10 range. However, the stock has since given back all of those gains, and then some, partly based on the weak market, but also based on Samsung launching a competing music service, as well as concerns about rising royalty costs eating into revenue growth, raising questions about its ability to monetize its market share gains.
In addition to Pandora, insiders also reported noteworthy buys last week in the tech sector in:
- Yahoo! Inc. (YHOO), a leading global internet search engine, ecommerce and media company, in which two insiders filed SEC Forms 4 indicating that they purchased 30,000 shares for $0.4 million, in comparison to insiders purchasing 65,000 shares in the past two years.
- LSI Corp. (LSI), a designer of complex high-performance ICs and storage systems, in which Director Charles Haggerty filed SEC Form 4 indicating that he purchased 20,000 shares for $0.14 million, increasing his holdings to 41,970 shares in direct and 100,000 shares in indirect holdings. In comparison, insiders purchased 40,000 shares in the past year.
On top of these, insiders also reported noteworthy sells this past week in the tech sector in:
- Google (GOOG), the Internet's premier search engine company, in which two insiders filed SEC Forms 4 indicating that they sold 73,343 shares for $43.1 million, with Executive Chairman of the Board Eric Schmidt selling 73,193 of those shares, in comparison to insiders selling 2.65 million shares in the past year;
- Linear Technology Corp. (LLTC), a manufacturer of standard high-performance integrated circuits for industrial, space and military, automotive, telecom, computer and consumer markets, in which five insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 174,240 shares for $5.0 million, in comparison to 1.07 million shares sold by insiders in the past two years;
- Skyworks Solutions Inc. (SWKS), the industry's leading wireless semiconductor company that is focused on radio frequency (RF) and semiconductor solutions for mobile communications applications, in which two insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 96,500 shares for $2.5 million, in comparison to 0.70 million shares sold by insiders in the past year; and
- Data storage vendor EMC Corp. (EMC), in which EVP & Chief Marketing Officer Jeremy Burton filed SEC Form 4 indicating that he exercised options to acquire 46,900 shares and sold 84,219 shares for $2.05 million, ending with 0.38 million shares after the sale, in comparison to insiders selling 2.81 million shares 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 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, and no plans to initiate any positions within the next 72 hours.
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