Insiders made noteworthy buys (see definition below) in five technology sector stocks this past week (June 4th to 8th, 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 sector, energy sector, and healthcare sector) 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):
Akamai Technologies Inc. (AKAM): Akamai is a global provider of services that help enterprises and e-businesses improve the delivery of their content and applications over the Internet. In the past week, two insiders filed SEC Forms 4 indicating that they purchased 176,422 shares for $4.9 million. The large majority of the shares (147,240) were purchased by Chief Scientist Thomson Leighton, who earlier purchased 100,000 shares at the end of April, a day after the shares plunged on a weak Q1 report. In comparison, insiders purchased 0.41 million shares in the past two years.
Mr. Leighton's continuing support of the stock is significant given that AKAM shares plunged late April after the company released its Q1 (March), now down almost 25% since the report. While the company beat on both revenue and earnings for Q1, and also raised its revenue projections for Q2 ($322-330 million v/s $315 million), it projected soft earnings for Q2 (36c-38c v/s 39c), raising fears of heightened competition in the space that may lead to lower margins (and earnings) going forward. Also, earlier this past week, shares plunged again (before recovering back fully) on news that Netflix (NFLX) was planning to roll out its own CDN (content delivery network), a move that sent AKAM and rival CDN players Limelight Networks Inc. (LLNW) and Level 3 Communications (LVLT) lower as well.
Given the uncertainty surrounding the competitive environment and margin trends for AKAM going forward, Mr. Leighton's continuing large purchases could be interpreted as a sign that at least this knowledgeable insider believes that the long-term trends that have propelled AKAM remain intact, and that despite all the talk about margin pressures, including those that may result from NFLX building its own CDN, it may be too early to conclude that competition will begin to hurt margins. AKAM shares currently trade at 16-17 forward P/E and 2.4 P/B compared to averages of 34.3 and 3.3 for its peers in the Internet services group, while earnings are projected to rise at a 10.6% annual rate from $1.52 in 2011 to $1.86 in 2013.
In addition to AKAM, insiders also reported noteworthy buys this past week in the tech sector in the following four stocks, the first two of which have also seen prices plunge recently:
- Hewlett Packard Co. (HPQ), a Silicon Valley marquee company, which is a leading provider of IT and outsourcing services, PCs and peripherals, printers and scanners, and servers and storage devices, in which Director Raymond Lane filed SEC Forms 4 purchased 226,300 shares for $5.0 million, ending with 0.25 million shares after the purchases. In comparison, corporate insiders purchased only an additional 7,800 shares in the past two years.
- Windstream Corp. (WIN), which 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 which three insiders filed SEC Forms 4 indicating that they purchased 22,000 shares for $0.20 million. In comparison, insiders purchased 0.29 million shares in the past two years.
- Brocade Communications Systems Inc. (BRCD), a network solutions provider that helps organizations worldwide transition smoothly to a virtualized world where applications as information can reside anywhere, by providing data center networking and storage area networking solutions, in which CEO Michael Klayko filed SEC Form 4 indicating that he purchased 50,000 shares for $0.22 million, ending with 1.15 million shares in direct and indirect holdings after the purchase. This is the only insider purchase at least in the last two years.
- Microsoft Corp. (MSFT), the world's leading software company, developing operating systems, business software and other applications for servers, PCs and intelligent devices, in which Director Stephen Luczo filed SEC Form 4 indicating that he purchased 17,500 shares for $0.50 million, ending with 133,500 shares after the purchase. In comparison, insiders purchased 33,500 shares in the past two years.
On top of these, large insider sales this past week in the tech sector included:
- a $19.5 million sale by five insiders at LinkedIn Corp. (LNKD), that operates an online professional network via its proprietary social networking platform;
- a $4.8 million sale by Chairman of the Board & CTO Henry Samueli at Broadcom Corp. (BRCM), which provides a portfolio of highly integrated system-on-a-chip and software solutions that enable wired and wireless broadband communications to manufacturers of mobile devices, computing and networking products, and service carriers;
- a $3.6 million sale by two insiders at Rackspace Hosting Inc. (RAX), a world leader and specialist in hosting and cloud computing, offering computing-as-a-service, including various types of managed hosting services, to SMEs as well as large enterprises worldwide; and
- a $1.5 million sale by EVP & General Counsel Michael Callahan at Yahoo Inc. (YHOO), leading global internet search engine, ecommerce and media company.
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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