Play Follow The Leader In Zynga

Jun.26.12 | About: Zynga (ZNGA)

When insiders sell together, the sale indicates either a decrease in revenue or another matter, which will most likely drive prices down. The trend I found with Zygna (NASDAQ:ZNGA) follows the "rules of the twos." After two insiders sell a large amount of shares, the stock price falls dramatically within the next three weeks as evinced below. The last set of sales was made at a time when selling seemed futile; as the stock price was at a 52 week low, which gave the stock both a low risk and a high potential for upside. But again, who am I to question the insiders - after all they're the ones inside.

After I saw this on Friday I initiated a short sell on Zygna , which I intend to hold until a target price of about $4.50. I have never seen a chart more telling of future stock prices. Peter Lynch points out in his book, One Up On Wall Street, that an insider will sell for various reasons, which is usually not very informative unless they are dumping shares or are selling along with another insider. Insiders, especially executives and directors of companies, know their company very well and therefore tracking their trading activities is a great indicator for the direction of the stock price.

Click to enlarge

PurchasesSalesOptions ExercisedOptions AwardedStock Gift

The Trading took place as follows:

04/01/2012

Reginald D. Davis
Secretary, Senior Vice President & General Counsel

634

Disposition at $12.82 per share.

8,127

04/03/2012

Mark Vranesh, CPA
Chief Accounting Officer

366,216

Disposition at $11.64 per share.

4,262,754

04/03/2012

Cadir B. Lee
Chief Technology Officer & Executive VP

1,171,664

Disposition at $11.64 per share.

13,638,168

04/03/2012

Mark J. Pincus, MBA
Director, Chief Executive & Product Officer

16,500,000

Disposition at $11.64 per share.

192,060,000

04/03/2012

Reid G. Hoffman
Director

687,626

Disposition at $11.64 per share.

8,003,966

04/03/2012

Owen van Natta
Director

505,267

Disposition at $11.64 per share.

5,881,307

04/15/2012

Reginald D. Davis
Secretary, Senior Vice President & General Counsel

14,578

Disposition at $11.46 per share.

167,063

04/15/2012

Mark Vranesh, CPA
Chief Accounting Officer

4,714

Disposition at $11.53 per share.

54,352

05/01/2012

David Y. Ko
Chief Mobile Officer

56,578

Disposition at $8.6 per share.

486,570

05/02/2012

David M. Wehner
Chief Financial Officer

58,889

Disposition at $8.79 per share.

517,634

05/20/2012

David Y. Ko
Chief Mobile Officer

18,523

Disposition at $7.12 per share.

131,883

06/09/2012

Cadir B. Lee
Chief Technology Officer & Executive VP

13

Disposition at $5.75 per share.

74

06/18/2012

Steven T. Chiang

69,849

Disposition at $5.87 per share.

410,013

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Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), the bankers of Zynga's IPO, agreed to modify the restrictions prohibiting insiders from dumping their shares. They were successful, and on April 3rd almost 20M shares were dumped at $11.64 AMC, much lower than the market's price of $12.20. The offering included more than 6 million shares bought by the company's IPO underwriters and generated just below $600M for the sellers, while providing nothing to Zynga or its common shareholders. As the company said in its April 3rd statement, "this was an orderly distribution of shares." I guess they consider a 30% drop in the stock price orderly.

MarketWatch put together a transaction summary of the total insider purchases and sales reported to the SEC:

Time Frame

Transactions

Shares

Last 3 months

16 Purchases

16 Sales

19,970,852

19,514,792

Last 6 months

24 Purchases

24 Sales

20,772,840

19,931,294

Last 12 months

30 Purchases

29 Sales

42,692,072

20,850,526

Click to enlarge

The increase of sales by insiders in the past three months indicates a strong feeling of the insiders to get out of their positions in the company. The ratio of sales to purchases has been, respectively 1:2, which has dramatically changed in the past three months to 1:1.

Now that the stock has bounced from the all time low of $4.78 to $6.00, it has provided a great opportunity to short sell, or to purchase put options on Zygna's stock. I suggest following the leaders in their transactions, as they have proven to predict future stock shifts.

Disclosure: I am short ZNGA.