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Greenberg: When Insiders Get it Right

By: Herb Greenberg | 11/19/13 - 09:03 AM EST

Stocks in this article: MELI

NEW YORK ( TheStreet) - One of the most dangerous games on Wall Street is to follow insiders. Just because they sell doesn't mean you should sell. The same goes for when they buy.

The key, as George Muzea of Muzea Insider Consulting, likes to point out, is following smart insiders -- that is, those with a record of buying and selling before the stock goes up and down.

Which gets us to MercadoLibre (MELI), the Amazon (AMZN) and eBay (EBAY) of such countries as Venezuela, Argentina and Brazil. In September I wrote a piece headlined, "Warning Bells at MercadoLibre."

A key part of the story outlined currency-related accounting and other issues cited by Marc Roberts of Off Wall Street Research, but also included this:

"At least one informed company insider, CEO Marcos Galperin, doesn't appear to be taking any chances. On Aug. 8 he sold 293,338 shares at $124.26 a share. This was his first sale in well over a year, and it represents 39% of his direct stock holdings.

"Insiders sell for all kinds of reasons, and selling in and of itself is not always a red flag. But, according to George Muzea of Muzea Insider Consulting, in the past Galperin has demonstrated an uncanny ability to sell before MercadoLibre's stock has taken a tumble. "He has top-ticked before," Muzea warns. "Be careful."

"Each time, the shares have recovered, moving to higher highs. Also, to be fair, Galperin and his wife still own 3.7 million shares through a trust, which ranks them among MercadeoLibre's biggest holders."

Since then, MercadoLibre's earnings have disappointed and regulatory concerns that could hurt MercadoLibre have surfaced in Venezuela. Noting that the risks don't justify the valuation, Morgan Stanley analyst Michel Moran on Monday downgraded the stock to underweight (otherwise known as sell) with a price target of $75.

That's considerably lower than the stock is today, which is lower than it was when Galperin sold.

Reality: Galperin isn't just a smart seller; he's a brilliant seller.

-- Written by Herb Greenberg

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security.

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