June 1, 2001
Heard on the Net
Insider Sales Raise Questions
About the Recent Tech Rally
By PETER EDMONSTON
WSJ.COM
Are they telling you something?
As investors warmed up to technology and Internet stocks again, pushing the Nasdaq Composite Index up more than 41% from April 4 through May 22, corporate insiders have been unloading shares of their own companies.
Insiders sell shares for many reasons, including a need to raise cash for personal reasons, but generally such activity is interpreted as a sign that top managers aren't optimistic about the prospects of their own companies.
The selling spree by top managers and directors at high-tech and Internet companies contrasts with a sharp drop in the level of insider buying -- another bearish signal.
"It's almost like there's a fear that the rebound won't be a sustained one," says Kevin Schwenger, a research analyst at Lancer Analytics, a unit of Thomson Financial that tracks stock transactions among corporate insiders. "People may be taking advantage of the bounce to take some profits."
Technology insiders sold shares of their own companies in April at 37 times the rate they were buying, according to Lancer Analytics, which is based in Scottsdale, Ariz. And they have grown more bearish compared with March, when the rate of insider sales was 16 times greater than purchases.
At Microsoft, for instance, the value of insider sales ballooned to $702.3 million in April from $35.5 million the previous month, according to Lancer. Much of the selling was by Microsoft Chairman Bill Gates, who cashed in 9.45 million shares, or about 1.3% of his registered Microsoft holdings, in what was his biggest block sale since September 2000.
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Also selling that month were William Neukom, Microsoft's executive vice president of law and corporate affairs, and James Allchin, a group vice president. Seven senior vice presidents and one director also sold shares.
Amid this wave of selling, investors were clamoring to buy Microsoft shares, sending them 24% higher to $67.75 in April.
Katy Fonner, a spokeswoman for Microsoft, said the company doesn't comment on the personal financial transactions of its employees. But she adds that Mr. Gates and many other company executives regularly sell fractions of their holdings in order to diversify their portfolios.
Novellus Systems, a seller of chip-making equipment, also saw a flurry of insider sales in April, a month when Novellus' shares surged 36% to $55.15.
Eight executives and directors filed to sell a total of $34.9 million in Novellus stock, compared with just $1.4 million in sales the previous month. Among the sellers were Richard Hill, Novellus' chairman and chief executive; Peter Hanley, the company's president; and Robert Smith, its executive vice president and chief financial officer.
A Novellus spokeswoman says the pickup in insider activity was related to regulatory restrictions on when top executives can sell company stock.
Mr. Schwenger of Lancer Analytics says a similar selling trend in the industry emerged in January, with technology insiders flocking to sell as their companies' stocks rose. The selling turned out to be a smart move for these insiders, because in February and March, the Nasdaq resumed its downward slide. "It's hard to ignore the correlation," Mr. Schwenger says.
Of course, executives often sell their shares for reasons that have little to do with their companies' business prospects. Among other reasons, insiders sell stock to diversify their holdings or to generate cash for personal expenditures. Also, many companies restrict executives to buying or selling stock during certain "window" periods, which can create the false impression of a widespread rush to sell.
And the level of insider selling among technology firms is not high by historic measures. Over the last five years, the rate of insider selling at technology firms on average was 37 times heavier than selling -- about the same as it was in April.
Nevertheless, in the broader market, the selling in April was far less intense that it was for technology stocks. Across all stocks, insider selling outpaced buying by about 16 to 1. While insider selling was up 15% overall, it was about half the rate of insider sales at technology companies.
Meanwhile, the value of shares bought by technology insiders slumped 31% to $20.3 million in April. That's the opposite of what happened among stocks overall, where insider buying edged up 2% in April to $172 million -- its highest level since December 1999.
"Overall, insider sentiment is relatively neutral, with a slightly bearish bias," says Mr. Schwenger, of Lancer Analytics. "But in the tech sector, it definitely got much more bearish in April."
Insider transactions are closely watched by some investors, who argue that stock purchases by employees -- especially high-ranking ones -- are hallmarks of a healthy company. When insiders sell, however, it can reflect a lack of confidence in their companies' prospects.
Indeed, heavy insider sales at media giant AOL Time Warner Inc. have recently raised questions2 among some investors. The sales, which come as the company embarks on a $5 billion stock buyback program, appear to undermine AOL's claim that its shares are undervalued, some analysts say.
Meanwhile, at Internet firms, insider selling has been especially intense recently.
Among the 40 components of the Dow Jones Internet Index, which climbed 33% in April after two consecutive monthly declines, the rate of sales outpaced purchases by 7,309 times in April, vaulting from 1,418 the previous month, according to data compiled by Lancer Analytics.
A large part of the selling among Internet insiders came at online auctioneer eBay, whose shares have risen more than 65% since the end of March. In April, top executives filed to sell more than 2.3 million shares valued about $110 million -- that's up from zero the previous month.
An eBay spokesman, Kevin Pursglove, says these sales were part of a "programmed selling schedule" observed by the executive team and the board.
Most analysts take such patterns into account when they examine insider selling. "You have to look how it compares with historic selling," says Tim Albright, an analyst at Salomon Smith Barney. "In the case of eBay, it's a very regular pattern."
Nevertheless, heavy selling and infrequent buying can be a bad sign, says Richard Zandi, an analyst who covers Internet financial-services stocks at Deutsche Banc Alex. Brown. Among the 11 companies he covers, Mr. Zandi says there have been only six reports of insider buying transactions so far this year, compared with 26 insider sales.
"When I go out and talk to these companies, they spend an hour telling me how great they are," Mr. Zandi says. "So how is it that no one's buying?"
Write to Peter Edmonston at peter.edmonston@wsj.com3 |
