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Stock Screen: Major Insider Purchases and Sales August 30, 2010
Insider stock purchases are often viewed as indicators of an undervalued stock. Insider sales are sometimes seen as a sign of an overvalued stock (though they are often more difficult to decipher than purchases). The reasoning for these views is pretty simple: insiders should know the most about their companies; so if they are buying or selling, others should consider following their lead. Of course, this doesn’t always work out as well as investors hope, but insider buying and selling can be a valuable tool in identifying potential investments or as a way to tip the balance when already considering purchasing or selling a company’s shares.
With this in mind, Value Line runs a regular screen of insider buying and selling in the back of the Selection & Opinion section of The Value Line Investment Survey. This time around, the screen turned up interesting insider selling activity at Lazard Limited (LAZ), Mohawk Industries (MHK), and VMWare (VMW).
Lazard Ltd is engaged in two primary businesses, Financial Advisory and Asset Management. The former accounted for 65% of revenues in 2009, while the latter made up the rest. The company offers financial advisory services regarding mergers and acquisitions, restructurings, and other corporate finance matters. Lazard’s Asset Management business had almost $130 billion in assets under management at year-end 2009. About 50% of revenues are derived from North America, 40% from Europe. The company employs over 2,200. Officers and Directors own 18.6% of the outstanding common stock.
Lazard posted a disappointing showing in the second quarter, as the volatile economic climate pressured results. However, the company topped its prior-year performance due to more favorable market conditions. Moreover, assets under management increased, year over year, in the June period. Still, we are taking a more pessimistic view on both the top and bottom line for this year and next, despite the fact that the longer-term outlook remains bright. The shares, meanwhile, have been trading higher since July. The approximately 20% advance in the share price since July, notwithstanding the less-than-idyllic outlook over the next six to 18 months may help explain why two directors sold a combined 413,215 shares in early August. Although it appears that the transactions may have been options driven, the sales are noteworthy nonetheless—these two directors potentially locked in profits as they sold material portions of their Lazard holdings. In one case the sale represented more than 70% of the directors’ stake.
Mohawk Industries designs and manufactures woven and tufted broadloom carpets/rugs and hard-surface flooring for residential and commercial use. It markets products through retailers, home centers, mass merchandisers, department stores, and commercial dealers. The company has more than 27,000 employees. All officers and directors own 18.3% of the outstanding common stock, though the Chairman and CEO accounts for the bulk of that figure.
Mohawk Industries has an impressive lineup of new products, but the carpet price increase announced in the final month of 2009 may barely cover its higher cost of raw materials. An additional price hike was announced for the third quarter, but given the flattening out of commodity costs over the last couple of months it may not be possible for the company to push it through. On a broader scale, uncertainty continues in the commercial market while residential carpet sales appear to be gradually recovering. Although not a completely negative picture, there are clear obstacles in Mohawk’s future. This may be why one director sold 100,000 shares, out of the just over 300,000 previously owned, in early August for over $52 per share. With a recent share price in the mid-$40 range, it seems the insider was able to lock in a decent profit on what may have been a temporary run up in the shares. However, if residential housing continues to falter, there could be more downside for the shares, which would make a compelling case for following this insiders’ lead.
VMware is a leading provider of virtualization software solutions, enabling organizations to aggregate multiple servers, storage infrastructure, and networks together into shared pools of capacity that can be allocated dynamically and securely to applications as needed. The virtualization software platform increases hardware utilization, reduces capital spending, and automates the management of complex computer systems. Sales in the United States accounted for 65% of 2009 sales, while international markets made up the remainder. EMC (EMC) owns about 80% of the outstanding common shares (4/10 proxy).
The VMware stock price has jumped about 35% since our last report in May, primarily due, we think, to strong results in the June quarter. And, in July, the company announced an updated version of its virtualization and cloud infrastructure platform. This software stock may be attractive to momentum investors as a way to play the rapidly growing virtualization market. EMC is a big fan, as it continues to add to its position. However, the stock's valuation remains very generous, which may be one reason why the CFO recently sold 90,000 shares (leaving the insider with a stake of just 75,541 shares). Although the future of cloud computing is exciting, locking in profits might not be the worst idea.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.