Saturday, September 15, 2012

Insider Sales: Underperforming The Market By 4 Percentage Points

Our past studies have shown that insider purchases beat the market on the average. On the other hand, insider sales have not outperformed the market. The reason is simple. Most insider sales are motivated by diversification or liquidity needs. However, there is new evidence that stocks sold under the 10b5-1 plans had large negative abnormal returns and we wrote an article a year ago about the stocks that insiders are selling like crazy under 10b5-1 plans. In this article, we are going to check out how these stocks performed since we published that article.

Returns of these 10 stocks since December 19, 2010 are as follows:

Company Name






Keynote Systems Inc



MetroPCS Communications Inc



Nanometrics Inc



The E. W. Scripps Company



Citrix Systems Inc



Sempra Energy



Martha Stewart Living Omnimedia Inc



Varian Medical Systems








On average, these 10 stocks returned 6.33% since December 19, 2010, while SPY was up 10.24% in the same period. Six of the stocks - NFLX, PCS, SSP, CTXS, MSO and VAR - underperformed the market since the day we published the article. The other four stocks significantly outperformed the market.

Netflix is the worst performing stock among these 10 stocks. It lost 28.99% since December 19, 2010, underperforming the market by nearly 40 percentage points. We still do not like NFLX. It was continuously sold by insiders over the past year. CEO Reed Hastings sold 5,000 shares at $119.7 on October 6, 2011. Hastings also sold 20,000 shares in September. The company's DVD subscription business is facing the risk of obsolescence.

Also, (AMZN), Netflix's main competitor, recently entered into the streaming business, which is likely to negatively influence Netflix's growth in the long term. Netflix still has some positive aspects. The company's fourth quarter 2011 results were much better than expected and its first-quarter 2012 guidance was solid. Over the third quarter, 13 hedge funds sold out their NFLX stakes, including George Soros' Soros Fund Management, Stephen Mandel's Lone Pine Capital, Chase Coleman's Tiger Global Management LLC, and Louis Bacon's Moore Global Investments.

MetroPCS Communications Inc also lost more than 20% since December 19, 2010. It was down 25.90% during that period, underperforming the market by 36 percentage points. We recommend investors should "hold" this stock right now. The company is facing significant competition in the wireless market. PCS has a focus on the prepaid market, which is becoming increasingly competitive. Additionally, the pricing pressure caused by the competition may also lead to the deterioration of profit margins.

On the other hand, PCS also has certain strengths. For instance, its early entry into 4G with LTE gives the company some advantages as an early adopter. It is also relatively cheap with an unlevered FCF of about 10, compared with 12 for Verizon Communications Inc (VZ) and Leap Wireless International Inc (LEAP). At the end of the third quarter, there were 18 hedge funds with PCS positions in their 13F portfolios. For example, Jim Simons' Renaissance Technologies initiated a brand new $13 million position in PCS over the third quarter. George Soros, Cliff Asness and Paul Tudor Jones were also bullish about PCS.

Though a few stocks listed above, such as NANO and KEYN, performed quite well by beating the market by over 20% since we published the article, these 10 stocks on average performed worse than the market. Therefore, although insider sales are not as informative as insider purchases, investors should still be cautious about stocks that insiders are selling like crazy, especially those that are sold under 10b5-1 plans.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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