NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among his posts this past week, Kass explained how you should interpret insider selling, why he's shorting Goldman Sachs (again) and why Facebook has "sell" written all over it.
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When Insider Selling Matters
Originally published on Thursday, Feb. 28 at 12:25 p.m. EST.
- If an exec cashes in five years before his option expires, that's a red flag.
One question I get a lot from subscribers is, how should insider selling be interpreted, and when should we consider insider selling as an important factor in our investment decisions?
Most insider sales are either outright share sales, 10b5 programs or the exercise of options (and subsequent sale of stock).
Obviously, outright, unscheduled insider sales are always a red flag, though there are often good reasons for such sales (diversification, estate planning, change in family status, etc.).
A majority of insider selling today is through planned 10b5 programs.
The plan must:
Specify the amount, price (which may include a limit price) and specific dates of purchases or sales, or
Include a formula or similar method for determining amount, price and date, or
Give the broker the exclusive right to determine whether, how and when to make purchases and sales, as long as the broker does so without being aware of material, nonpublic information at the time the trades are made.
Given the design and structure of 10b5 programs, they are rarely a signal of concern.
But another, less obvious red flag is generated on the execution of options and immediate sale of stock. This occurs not at all times but clearly when an executive exercises options and sells stock well in advance of the scheduled expiration of the option. After all, if one has confidence in a business, why not wait and allow a company to flourish and grow?
A good case in point (one in which a red flag is raised), is this recent transaction by an insider who exercised options and sold
Grand Canyon Education
shares last week.
In this transaction, we can see an insider sale in February in which one of LOPE's executives has exercised options on three separate lots (of 50,000, 8,717 and 12,339 shares) between Feb. 22 and Feb. 25, 2013. The shares were exercisable at $12 a share (on Nov. 19, 2009, and Nov. 19, 2010) and were sold between $25.00 and $25.50 a share.
The most important factor in evaluating this option exercise and sale is how far out into the future the options expire. In this case, the options expire well out into the future, on Nov. 18, 2018.
Again, while there can be numerous reasons for an exercise and sale of stock well ahead of expiration (see above), we should ask ourselves, why would this executive exercise an option more than five years before the option expired? Why wouldn't the insider wait, especially if he had confidence in Grand Canyon's franchise and future revenue and profit growth? Isn't the exercise a vote of no confidence in the company's future?
Inquiring minds want to know!
At the time of publication, Kass was short LOPE
Reinstating Goldman Short
Originally published on Thursday, Feb. 28 at 10:12 a.m. EST.
- UBS sees headwinds.
I am reinstating my
short at $151.50 -- I feel naked without it!
More seriously, UBS reports this morning that after a strong January, the "market environment is not as constructive." This might surprise many who think that Goldman's business is robust in concert with a near new high in the
With limited visibility regarding regulatory change, UBS sees some headwinds facing the company (but with the ability to manage expenses) and has a price target of $145.
Bottom line: UBS views GS as a well-run franchise with the ability to be flexible in its cost structure, but the brokerage believes Goldman's positives are more than fully discounted in the current share price.
At the time of publication, Kass was short GS, SPY
Why I Sold Facebook
Originally published on Wednesday, Feb. 27 at 10:26 a.m. EST.
- BTIG's downgrade made some salient points.
Yesterday I sold my
shares, and I promised to explain why.
What turned me around on this name was BTIG's Richard Greenfield's research report in which he downgraded the stock to sell.
If you can access
(registration required) and you are involved in the stock, I suggest you read his analysis.
- 2013 sales and profits will miss consensus, as desktop ad revenue peaks and mobile growth is not rapid enough.
- 2014 looks worse, and below-consensus results are expected.
- Valuation, at 17 times 2014 EBITDA and 45 times free cash flow, is full and vulnerable to misses to consensus.
The shares are trading lower today probably based on:
an article in The Wall Street Journal that suggests Twitter is monetizing better than Facebook; and
the buy on rebalance today is less than previously thought.
At the time of publication, Kass had no positions in stocks mentioned.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.