>>Any thoughts on the recent wave of selling by insiders at WIND? .Richard Kraber, the CFO, maintained that this was just diversification on the part of directors.
Insider selling is bad (as an indicator), if insiders are dumping stock because they think the company is set to under-perform, or the stock price is excessive. So far, there has never been a correlation between WIND insider selling and poor company or stock price performance.
There are two distinct situations at WIND leading to insider selling. The first is the selling, particularly during the secondary in July, by the co-founders, and the second is the ongoing selling by co-founders and managers alike.
In my opinion, the co-founders sold off 1/3 of their stock, in a couple of chunks, to diversify their holdings and free up assets. Whether or not selling stock and facing significant taxes was the best mechanism to achieve diversification, something along that line makes absolute sense, as I indicated in an earlier post.
As for the others, stock options are a form of compensation, purposely made significant by stockholder representatives because we want these people to work extremely hard for shareholders, and not just to preserve their jobs, salaries and benefits. By providing a large portion of their everyday earnings in the form of stock options, we line up their interests with ours. Sure, they have the choice of socking away the stock options, and treating options as an investment, but there are a lot of pressures to cash out as options as they become available. (The main one being wanting money to spend.) And once they decide to cash out, they need to sell most of what they have, to cover the purchase price and taxes. Finally, they only have the opportunity to make this hay while the sun shines - that is, while the stock increases rapidly.
Unlike investors long in the stock, insiders with options cannot easily leverage their holdings to give them purchasing power. To me stock is just like money - I don't have to sell it to enhance my purchasing power. If WIND doubles in a year, then my purchasing power goes up automatically, without having to sell the stock and pay taxes. But this isn't true of a WIND executive holding options on 10,000 shares. Generally, the executive has to sell the options (and suffer the purchase cost and taxes) to reap the current benefits of the stock option.
Also, asset managers recommend that employees diversify their holdings away from the company that employs them. The reason is that if something bad happens to their career (like being fired), it might be correlated with poor performance of the company's stock. - giving the unfortunate employee a double whammy. This, like many other decrees stemming from Asset Allocation normally would not be my recommendation.
How do we investors feel about the selling? "Just when the stock is about to make a break through and make a new high, insiders sell shares, slowing the rise and causing the nervous momentum players to quickly follow and take profits. So the stock falls back down to its recent support level."
Does this happen? Probably. But even if it does, it doesn't do lasting harm. I view insider selling as a useful release valve, relieving price pressure before it gets excessive. Insider selling also increases the float, and hence is good for liquidity.
The bottom line is this. The price of the stock in out-years will be extremely attractive, irrespective of insider selling for the reasons given. If insider selling has any effect at all on the price of the stock, it is to modulate it and increase liquidity, both of which reduce volatility. As a long-term investor, I view the selling favorably.
Allen |
