In the past couple of weeks, the higher-ups at
have triggered some investor alarm bells by selling off big chunks of stock.
The company's chief operating officer and chief financial officer have each parted with hundreds of thousands of shares, a trio of other insiders have sold stock for the first time, and CEO Michael Dell has made a hefty sale of his own.
To be sure, sales by Michael Dell have typically preceded a rise in the company's stock in the following months -- in line with the historic upward movement of Dell shares. But the current pattern of sales by a number of top executives is at least a caution sign, since it suggests the smart money doesn't expect to see much near-term upward movement in the stock. Also, it occurs amid a so-so growth outlook for PCs.
Dell has gained fame for its uncanny ability to trump the broader PC market, growing by grabbing share from rivals like
. But the continually weakening sales outlook may still give some executives pause. In mid-March, IDC cut its 2003 unit sales forecast for PC growth around to 6.9% from 8%.
"The most obvious thing we can get from this pattern is that if all these people really thought Dell was ready to spike up, I would think they would have held onto some shares, or waited to cash out at another time," says Jonathan Moreland, director of research at InsiderInsights.com and a contributor to
. "It's unlikely all these options are about to expire. I'm sure in some cases they had leeway to sell later rather than sooner."
"I probably wouldn't be shorting the stock, but I would not consider going long right now," he says.
As stock movements go, the timing of the sales looks pretty savvy. Most occurred in early to mid-March, when shares had already rebounded smartly from Dell's near-term low of $22.86 on Feb. 10. The stock has gained 23% since then, based on Thursday's close of $28.10.
On March 14, Michael Dell sold off 10 million shares, which comes in the wake of an equal-sized sale in November. Prior to that, he hadn't sold stock for almost two years, since June 2001.
But though Dell doesn't buy or sell often, it's characteristic of him to do it in a big way. On Sept. 27, 2001, when Dell shares were changing hands at a bargain basement price of $18.04, he scooped up 4.3 million shares.
In his last sale, in June 2001, he let go of 10 million shares priced at $25.61. And between March and July 2000, when the stock traded in the high $40s to $50s, he sold 18 million shares.
"The size of the latest trade doesn't jump out for him, at least," says Lon Gerber, director of research at Thomson Financial/Lancer Analytics. "But he hasn't done it for quite a while."
Dell's sale alone isn't necessarily cause for concern. In fact, his sales have usually foreshadowed a substantial upswing in the stock, which reflects its impressive performance over time. According to calculations by Insiderscores, Dell, who owned 300 million shares at the end of 2002, has sold company stock 65 times since 1988. On average, the stock has risen 33% in the six months following the sale.
But it's notable that Dell's sale has been accompanied by a handful of other insider trades, which may be partly due to the middling near-term outlook for PC sales.
As is the case with Dell, a recent sale by Chief Operating Officer Kevin Rollins doesn't look unusually big, but it's striking that it comes after nearly two years of inactivity.
Rollins exercised 270,000 options at the end of February and sold. That's much smaller than his last exercise of 845,000 options, but it also marks the first sale since June 2001.
Another executive, James Schneider, exercised 200,000 options and sold on March 17, following the sale of 80,000 shares in January and 200,000 shares in November. Prior to November 2003, his last sale was nearly a year ago, when he let go 300,000 shares in November.
Meanwhile, a handful of other Dell executives -- William Amelio, Jeffrey Clarke and John Hamlin -- recently sold shares for the first time, collectively disposing of about 163,000 shares.
It's also worth noting that two of the recent insider sales -- those by Rollins and Schneider -- reflected the exercise of liberal options grants. Despite its reputation as a cost-cutting taskmaster, Dell has been far from stingy on the options front.
But were accounting rules to change, the company's fondness for option giveaways would prove a substantial drag on profits.
If Dell had expensed its options and employee stock purchase plan in fiscal year 2002, it would have reduced its pretax income by a whopping $964 million and earnings per share by 27 cents. Without accounting for options, it reported a profit of $1.24 billion and earnings per share of 46 cents.