Insiders Are Selling Shares at B2Bs -- Even as They Tout Recovery

If B2B stocks are finally getting up off the mat following their brutal drubbing this spring, why are so many insiders filing to sell shares? Does this suggest a recovery in the sector won't be easy to sustain?

Regulatory documents show scores of insiders at B2B companies filing to sell shares in recent weeks. Market players say those filings suggest that even if B2B's future is as bright as execs insist it is, the sector will continue to be racked by volatility as insiders reduce their exposure to stocks they're heavily invested in.

Experts on insider trading warn against drawing stark conclusions about individual companies from these sales. "Insiders" is a broad term, they warn, covering directors and early-stage investors of all descriptions, as well as executives. But looking at selling action can pinpoint big holders' feelings about their investing prospects at a given moment.

'Way Undervalued'

The pattern of sales among B2B insiders is unmistakable. Mark Walsh, president and chief executive of B2B community-builder VerticalNet (VERT Quote), for example, filed on May 30 to sell 195,000 shares for an estimated $6.1 million. The stock closed up 5 1/8 that day at 34 5/16, more than 5 points above its May 26 low, though far from its closing high of 138 57/64, reached back in March.

Walsh is in good company. Since May 15, insiders at Ariba (ARBA Quote), Commerce One (CMRC Quote), Internet Capital Group (ICGE Quote), i2 Technologies (ITWO Quote), PurchasePro.com (PPRO Quote), Agile Software (AGIL Quote) and Vitria Technology (VITR Quote) have notified the SEC that they are selling shares.

Off the Table Insider-selling filings at B2B companies since May 15
Company	Shares filed*	Shares Outstanding (millions)
Ariba (ARBA:Nasdaq)	943,600	236
Commerce One (CMRC:Nasdaq)	3,605,764	156
PurchasePro (PPRO:Nasdaq)	110,572	32
Broadbase (BBSW:Nasdaq)	52,749	47
Portal Software (PRSF:Nasdaq)	3,446,187	162
Internet Capital (ICGE:Nasdaq)	5,161,390	265
VerticalNet (VERT:Nasdaq)	351,030	81
Vitria (VITR:Nasdaq)	1,889,525	127
*Shares proposed for sale by insiders. Source: SEC filings, MarketGuide.

Do such sales indicate a lack of confidence?

"I actually think our stock is still way undervalued," says Walsh. "I am just diversifying a small amount each quarter because that's what people with advanced degrees in financial planning tell me and my wife to do." Walsh was recently vested for about 1.5 million VerticalNet shares. He says that since coming to VerticalNet from America Online (AOL Quote) in 1997, he has been granted options on more than 3 million VerticalNet shares, of which he has sold some 10%.

Keith Krach, chairman and chief executive of Ariba, filed to sell 600,000 shares recently, while Ariba Chief Financial Officer Edward Kinsey signaled his intent to sell 190,000 shares. Other executives have also been selling at the company.

But Krach, who owned 10,215,582 Ariba shares on Dec. 31, says things have never looked better for Ariba, which reported a record $40 million in revenue last quarter.

"The fundamentals of our business have never been stronger," Krach says, while pointing out that his recent filing represents less than 3% of his holdings. "We've had 10 consecutive quarters of being cash-flow positive and we doubled our customers last quarter. Our business is absolutely on fire." Even so, at Thursday's close of 72 3/8, Ariba was still more than 60% off its split-adjusted high of 183 5/16.

No Surprise

Insiders, of course, are subject to some of the same issues as other investors; they can't always choose the best moment to sell if they need cash to pay taxes, for instance. And they can also get whacked by market swings between the time they file to sell and when they can execute their trades. Tim Middleton, an analyst at Edgar Online who follows insider-trading filings, notes the consistent selling of Ariba shares by executives despite the stock's falling price throughout the spring.

"I first started noticing these in early May, but some of the sales that I then checked out took place back in January and February," Middleton says. "The most striking thing, other than the fact that so many insiders are registering to sell, is what's happened to the price of those shares."

At the same time, outside investors can sometimes get a hint of where the market is headed by watching insiders. "I do think it's fair to say that insider selling in February and March in the aggregate did tell you something about the market in April," says Craig Columbus, president and chief executive of InsiderScores.com, a Web site that tracks insider activity. "The number of sellers vs. buyers was heavily skewed toward record levels of selling. It was meaningful because every time those indicators have flashed toward the sell side, we've had a significant market correction."

But Columbus cautions that sales are not a very reliable indicator. "If you're going to paint a broad-brush picture, buying is a more useful tool."

Where does that leave us now? In an uneasy spot: "It's never really a great sign when you see insider selling into the first indication of a rally," Columbus continues. "But when you step outside the boundaries of the top officers and directors, you tend to get even more indiscriminate selling."

Prelude to a Bull?

To be sure, there are B2B buyers, too. Walter Buckley, president and CEO of Internet Capital Group, bought at least 70,000 shares in May, and Agile Software's Bryan Stolle says he'll end the quarter with more shares than he started with. Meanwhile, VerticalNet's Walsh says he's plowing some of his proceeds from his sales back into his company's stock to ease capital-gains liabilties.

And Columbus says there may even be a more optimistic trend in the insider moves of technology companies. He sees the activity returning to a more normal level, with some insiders even buying at the lows, a trend that in October 1998 was prelude to the stampeding bull market of 1999. But, for now, the balance is tilted toward the sell side, which can be read as a sign of tougher times ahead.