Analyzing Last Week's Noteworthy Insider Trades In Tech

by: GuruFundPicks

We present here 13 noteworthy insider trades last week (April 2nd to 6th, 2012) in the technology sector from over 1,300 separate SEC Form 4 (insider trading) filings during the week, as part of our daily and weekly coverage of insider trades (other sectors, including insider filings in the basic materials and energy sectors last week, are summarized in separate articles, that can be accessed by clicking on the above hyperlinks). 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):

Broadcom Corp. (BRCM): Broadcom provides a portfolio of system-on-a-chip (SoC) and software solutions for wired and wireless communications to manufacturers of computing and networking equipment, digital entertainment and broadband access products, and mobile devices. On Wednesday, Chief Technical Officer Henry Samueli filed SEC Form 4 indicating that he acquired 200,000 shares by converting Class B common stock to Class A common stock, and then sold those 200,000 shares for $7.7 million, ending with 0.37 million shares after the sale (not including derivative securities). In comparison, insiders sold 1.37 million shares in the past year.

BRCM shares have been trading in a narrow consolidation range near their 52-weeks highs since reporting their Q4 results at the end of January, in which they beat analyst revenue ($1.82 billion v/s $1.8 billion) and earnings (68c v/s 65c) estimates. The shares currently trade at a discount 11-12 forward P/E and 3.1 P/B compared to averages of 15.8 and 1.9 for its peers in the communications semiconductor group, while earnings are projected to rise at a modest 5.6% annual rate from $2.89 in 2011 to $3.22 in 2013.

DISH Network Corp. (DISH): DISH provides direct broadcast satellite subscription TV services nationwide. On Wednesday, three insiders filed SEC Forms 4 indicating that they exercised options and sold the resulting 134,000 shares for $4.3 million, pursuant to 10b5-1 plans, with a large majority of the shares (100,000) sold by EVP Stephen Wood. In comparison, insiders sold only an additional 121,000 shares in the past six months, and they sold a total of 0.63 million shares in the past year.

DISH shares have been strong recently, trading near four-year highs, after the announcement of a favorable FCC rulemaking proposal in March that seeks to allow satellite airwaves to be available for mobile broadband use, which would enable DISH to launch a wireless cellular network. Its shares now trade at 11-12 forward P/E compared to the 14.6 average for its peers in the cable TV group.

LinkedIn Corp. (LNKD): LNKD operates an online professional network via its proprietary social networking platform that enables members to create, manage and share professional identities online, build and engage with their professional network, access shared knowledge and insights, and find business opportunities. On Wednesday, five insiders filed SEC Forms 4 indicating that they converted Class B common stock into Class A common stock and sold the resulting 244,533 (Class A common) shares for $25.1 million, pursuant to 10b5-1 plans. This is in addition to the 0.36 million shares sold by insiders in March, and an additional 0.22 million shares sold in February.

The heavy insider selling last week comes at a time when LNKD shares are consolidating at their highs following a rally that lifted shares by a third following the bullish Q4 reported two months ago, in which it beat analyst revenue and earnings estimates by wide margins. The LNKD story is compelling, and revenues and earnings are currently exploding with strong growth projections in the near term. However, at 88 forward P/E, compared to the 28.2 average for its peers in the Internet services group, while earnings growth is projected at a 75.7% annual rate from 35c in 2011 to $1.08 in 2013, we believe that shares are close to full valuation, and the risk ahead of the Q1 report to be released on the third of next month may be to the downside.

On top of these, some additional large insider sales in the tech sector last week include:

  • A $17.6 million sale by four insiders at Qualcomm Inc. (QCOM), a designer of CDMA-based, RF and power management ICs for system software used in wireless handsets, modem cards and networks;
  • A $14.3 million sale by two insiders at Seagate Technology (STX), a manufacturer of hard disk drives for the enterprise, desktop, mobile computing and consumer electronics markets;
  • A $9.6 million sale by seven insiders at Red Hat Inc. (RHT), a provider of open source enterprise operating systems and related systems management services based on Linux;
  • A $9.2 million sale by six corporate insiders at Tangoe Inc. (OTC:TNGO), a global provider of communications lifecycle management software and related services, primarily to large- and medium-sized businesses, and other organizations worldwide;
  • An $8.9 million sale by CEO Jen Hsun Huang at 3D graphics processor designer and developer NVIDIA Corp. (NVDA);
  • A $4.9 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;
  • A $2.2 million sale by six insiders at Pandora Media Inc. (P), a premier provider of Internet radio in the U.S., offering listeners streaming music based on analysis of user listening behavior, and offering its services on traditional computers and on smart phones such as Android phones, BlackBerry's and the iPhone;
  • A $1.5 million sale by CEO Kevin Thompson at Solarwinds Inc. (SWI), a developer and marketer of network, applications and storage management software; and
  • A $1.2 million sale by three insiders at real estate information marketplace Zillow Inc. (Z).

Furthermore, insiders also reported a noteworthy buy last week in the tech sector in:

  • Qualstar Corp. (QBAK), a manufacturer of automated magnetic tape libraries for data storage and retrieval in enterprise networks, in which BKF Capital Group, an insider by virtue of its 10% ownership of the company, purchased 20,200 shares for $37,180.

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 10% or 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 non-public 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 may be 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 were based on SEC filings, Zacks Investment Research, 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.

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.