Shares Are Dumped as Pessimism Takes Hold
Insiders at Los Angeles-based public companies are aggressively dumping stocks, suggesting widespread pessimism about local corporate performance in the months ahead.
An analysis of Securities and Exchange Commission filings for the six months ended Aug. 13, done for the Business Journal by Duff & Phelps LLC, shows that local public company insiders sold 21.5 million more shares than they bought, a dramatic reversal from the prior six months when L.A. insiders were net buyers of 16.4 million shares.
“On the sell side, you are seeing it across all sectors,” said Ken Nofziger, a vice president at Duff & Phelps. “Longer term, (insiders) don’t see any more significant run-ups coming, and there’s probably significant downside risk. So they’re (liquidating positions) while the gettin’ is good.”
The wave of insider selling is sweeping through a broad spectrum of industries, with technology, finance, retailing, manufacturing and even real estate stocks being sold in large quantities. Sellers outnumbered buyers by almost a 4-to-1 margin among L.A. insiders during the six-month period. There were 587 insider sales transactions and 152 buys, translating to 3.86 sales for each buy, according to Duff & Phelps.
The aggressive L.A. selling mirrors a national trend.
Investor’s Intelligence, an investment newsletter, tracks insider trading activity in 88 industry groups, on a quarterly basis. “A couple years ago, 35 of them had their best insider buying in five years,” said editor Michael Burke. “Now (in the most recent quarter), 29 groups have their worst buying in five years, another eight have their second-worst buying and another eight have their third-worst buying. So 45 out of 88 groups have very heavy insider selling.”
The local company seeing the highest volume of insider sales was eToys, with 10.2 million shares dumped by insiders in mid to late February, when the ill-fated e-tailer finally shut its doors.
Etoys is not alone. Homestore.com Inc., Netzero Inc., Capstone Turbine and California Pizza Kitchen all former high-flyers that nose-dived in the past year have seen heavy insider selling. And that selling runs contrary to the national trend of insiders “selling into strength,” or unloading shares when their companies’ stocks temporarily blip upward.
Yet even as these stocks tumble and insiders reduce their exposure, Wall Street continues to trumpet their potential, suggesting that despite pressure from Congress, analysts’ bullish orientation remains intact.
W.R. Hambrecht & Co., J.P. Morgan and U.S. Bancorp Piper Jaffray all reiterated “buy” recommendations last week on Homestore.com, whose stock closed Aug. 15 at $22.36, down sharply from $55 a year ago.
First Union Securities, Banc of America Securities and U.S. Bancorp Piper Jaffray within the past couple months all reiterated “buy” recommendations on California Pizza Kitchen, which closed at $20.98 on Aug. 15, down from $35.13 last October.
Plenty of investors, including insiders, don’t share Wall Street’s optimism. As of July 9, 24.8 percent of California Pizza Kitchen’s shares were sold short, according to securities research firm Market Guide Inc., meaning that investors holding those shares were betting the price would decline.
In addition to fallen stars, some of L.A.’s best-performing stocks are being unloaded. Among the top performers with at least a dozen insider sales and not a single buy during the past six months are computer gamemakers Activision Inc. and THQ Inc., apparel retailer Hot Topic Inc. and auto accessories manufacturer Superior Industries International.
Insiders’ motives for selling are numerous often related to a desire to reduce risk through diversification and/or to realize profits by exercising options. But specialists who analyze such activity assert that trading reversals from net buying to net selling as is occurring in Los Angeles are usually signs of pessimism.
“I would view that with strong negative implications,” said David Coleman, editor of Vickers Weekly Insider, an investment newsletter that tracks insider trading.
To help identify such reversals, Vickers has developed a proprietary “insider index” that takes into account not just the volume of insider buys and sales, but other factors, such as unanimity among insiders and percentage changes in holdings. Positive index values indicate insider bullishness and negative values indicate pessimism. Scores between -5 and +5 are considered “neutral.”
Computer gamemakers Activision and THQ are among the L.A. companies suffering the greatest deterioration in their Vickers index scores. THQ’s score was +66 a year ago and now sits at -73. Activision’s score was “neutral” a year ago and is now -171, making it the fourth-least-liked U.S. stock among insiders.
“Activision today is one of the highest-rated negative stocks,” Vickers editor Coleman said. “These (index reversals) certainly raise a red flag.”
Activision officials did not return a call seeking comment last week, and THQ officials were not available, according to spokeswoman Liz Pieri.
While taking profits in tech-related stocks might be well advised, considering Nasdaq is in a serious bear market, insiders have been bailing out of even some local stocks in the real estate sector one of the few areas still growing.
KB Home, one of the largest builders of entry-level homes in Southern California, has seen 16 insider sales of a combined 1.95 million shares over the past six months, and not a single insider buy. In a further sign of investor pessimism, 21.5 percent of KB Home’s shares were held by short-sellers as of July 9, according to Market Guide.
“Yes, we’ve had individuals selling some stock, for various reasons,” said Clem Teng, KB’s director of investor relations. “But we instituted a policy on March 8 that requires our senior corporate executives and divisional managers to achieve ownership levels of our stock equal to one to four times their annual salary. That demonstrates to the world that we are in alignment to the shareholders.”
Another local real estate stock, Glendale-based Public Storage Inc., which hit a new 52-week high last week, has seen insiders sell 2.7 million more shares than they’ve acquired over the past six months.
That net sell-off was almost entirely due to Colony Capital’s March 21 divestiture of 2.6 million shares, at about $26 each. Colony officials declined to comment.
Asked about Colony’s exit, Public Storage President Harvey Lenkin said, “You’re going to have to talk to (Colony CEO) Tom Barrack about that. That’s why people buy stock to buy it and sell it.”