JDN,
Perhaps of the reasons for EMC's recent sell off is an article that appeared in the October issue of FORBES magazine. The issue came out in the last week of September (when EMC was around 62) I however, did not notice it until last evening.
Here it is:
By itself, a high multiple of earnings is not the reason to stay away from a stock. Microsoft, Cisco and Pfizer have done well in the past several years, despite their high P/ES. Institutional ownership?. Ideally, you want to discover a company before the big guys do, but even if you get in late you can do well-these same stocks being good examples. How about insider selling?. Sometimes the selling is innocent, not a sign of a decline in the business. Maybe the chief executive needs some cash to buy a summer home.
But what if these three cautionary signs coincide?. Stay away from the stock, recommends Robert Gabele. He is the founder of Rockville, MD.-based CDA/Investment, an information services firm that tracks insider buying and selling .
Recent example: Parametric Technology, which sells software for industrial design. Insiders sold 208,000 in the second quarter. Were they all going house-shopping?. Does not look that way. On July 1 Parametric's management issued a profit warning for the third quarter, as Parametric's Asian clients cut back sharply on purchases.
The day before, the hot growth company was selling at 29 time trailing earnings. The day the grim announcement came out, Parametric's stock fell 35% on volume of 40 million shares, or 15% of the shares outstanding. "When large shareholders sell, exit doors for smaller holders become very small." says Gabele. Parametric Technology is off 63.6% since June 30, versus an S&P 500 decline of 7.5%.
A few other prime examples Gabele points to are Sunrise Assisted Living, Adeaptec and Oxford Health Plans. These companies were Wall Street darlings before negative earnings surprises torpedoed their stocks, Each of them also had the dangerous combination of heavy insider selling and high institutional ownership prior to the release of the bad news.
Gabele focuses his attention on relatively new companies. We took this concept to the larger universe of stocks with a hunt through the Market Guide database for companies meeting these criteria: They have a market value of at least $500 million; at least 3 insider sellers during the past 3 months with a total of at least $1000,000 of shares sold; institutional ownership of 80% or more; and a P/E multiple of at least 30, compared with a market multiple of 25:
AnnTaylor Stores
Compuware
EMC
Hasbro
Kohls
Omnicom
Staples
SunGard data Sys |
