More on insider selling

Investment Analysis Clubs Saul’s Investing Discussions
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Just last Thursday, two trading days ago, I posted this:

A week or so ago, someone on this board posted his concerns about insider selling of INFN at $18 to $19, which (I think I remember), influenced him to sell his shares.

I pointed out that, on April 16, after a long and extensive debate (which they published), MF Supernova sold a third of their position in AMBA! Why? You’ll never guess! Mostly because the AMBA insiders had sold a lot of their shares. Really a lot, according to the worriers.

The price of AMBA on April 16, when Supernova sold, closed at $74.60. Most of the insiders sold for less. In fact, when I looked it up, they’ve been selling lots since $46 in December! Yesterday (about six or seven weeks later), it hit $91.80 !!! That was up roughly 100% from those insider sales in December, and up about 20% from when Supernova got scared and sold. The insiders would have doubled their money if they hadn’t sold. What does that tell you? Think about it for a second…

I don’t give any guarantees, but insiders are usually better at running their companies than managing their stock market investments. I wouldn’t make any decisions based primarily on insider sales, without some confirmatory evidence…

Well today AMBA is up another $5.50 cents. Don’t ever get scared out just by insider selling. If you look back at amazon.com or Apple, you’ll see insiders were selling all the way up from when the stock was a tenth or less of todays price. That’s just not not evidence of anything. Peter Lynch was right.

Saul

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A week or so ago, someone on this board posted his concerns about insider selling of INFN at $18 to $19, which (I think I remember), influenced him to sell his shares. - Saul

Saul then went on to discuss AMBA. I don’t own AMBA and have no interest. My post was specifically about Infinera (INFN). Here’s my OP:

http://discussion.fool.com/i-had-mentioned-before-a-time-or-thre…

Given that it’s my understanding that at least several board regulars have invested in INFN, I felt it was time to move past generalizations and Wall Street nostrums and actually consider a few FACTS.

As stated in my OP, I was a contented INFN investor and was steadily buying shares. Then, this popped up on my screen:

http://tinyurl.com/navrv9r

Director Hooshmand Kambiz sold 100,000 shares of Infinera Corp. stock in a transaction dated Friday, April 24th. The stock was sold at an average price of $19.38, for a total transaction of $1,938,000.00. Following the completion of the sale, the director now directly owns 35,234 shares in the company, valued at approximately $682,834.92.

Wait. What? Hooshmand Kambiz is the Chairman of the Board!

Then I saw this:

http://tinyurl.com/nlxv2tk

President David F. Welch sold 30,000 shares of the stock in a transaction dated Monday, April 27th. The shares were sold at an average price of $20.40, for a total transaction of $612,000.00. Following the completion of the transaction, the president now directly owns 14,132 shares in the company, valued at approximately $288,292.80.

Huh? Dr. David Welch is the founder and President! OK, these news bits definitely grabbed my attention. Decided to do a bit o’ research:

http://www.nasdaq.com/symbol/infn/ownership-summary

I didn’t like what I was seeing. I discovered there were significant insider sells this past year and the past three months. We can now add Tom Fallon to the list of significant sellers.

OK. Time to dive a bit deeper. Yahoo offers nice summary tables:

http://finance.yahoo.com/q/it?s=INFN

Again, I didn’t like what I was seeing, so I dove deeper. My “Go-To” site for insider trading info is MarketWatch:

http://www.marketwatch.com/investing/stock/INFN/insideractio…

I like this site because it names names and presents the record of insider trades. The stock chart allows one to trace insider trades along with stock prices. As one can see, the sheer volume of insider stock sales drove down the stock price in late April/early May. I’m not a big fan of insiders actually depressing the stock price. Just sayin’.

One of the features I like about MarketWatch’s data, is that one can click on the name of an insider and review the history of trades. Let’s take a look at Tom Fallon’s trades. Tom’s the CEO (and he’s been selling quite a few shares)!

I’m not liking this at all. Here’s how Thomson Reuters/Verus described the INFN insider activity (Sorry I can’t provide a link. I can access it via my Fidelity research tools…for those with comparable research resources, look for the June 1, 2015 report). Here’s their summary:

Infinera Corporation’s most recent quarterly sell total of $7,377,338 represents the highest level of Q2 selling at the company over the past five years.

A recent #3,929,900 sale by Thomas J. Fallon represents the largest sale at Infinera Corporation in five years.

So spare me the platitudes and nostrums. The BIG DAWGS at INFN are selling waaay more shares than one typically sees in the ranks of TOP DAWGS (i.e., Founders, Chairmen and Presidents). The reason I posted my OP is that I found this activity most unusual.

I reacted by selling half my shares. I now hold a 3% position in INFN. Given that I’m not sure what to make of these sales, I’m still willing to hang on to those shares. On the other hand, given that they still bear unrealized gains, it wouldn’t take much for me to cash out and harvest the gains.

For those believing INFN is on the cusp of a significant break to the upside, I’ll be hoping, too. Unfortunately, the insider trades indicate that the Top Dawgs aren’t exactly on board with that.

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Jon,

Great post and great observations. I too got a little closer to this, did some research and was somewhat alarmed at seeing these sales.

Then I found something else out about the compensation model for the executives and directors - they are routinely (annually?) awarded stock, and with those awards comes a multi-year vesting period.

The stock they sold was held through multiple years of vesting and I can’t say I blame them for selling to reap some of the rewards.

Some of those folks (like David) have been patient for over a decade. Others have put in their 6-7 years. The good news (or bad news?) is that there is more that can be awarded. It is part of their comp model.

Now, I don’t know if the knowledge of stock based compensation sits any better, but it does at least align their interest with ours. It is unfortunate they felt the need to sell, but again I can’t say I blame them. The competition in this market is fierce and they put in a grueling number of hours in to stay in the game. I view this last round as a reprieve; a breather to take in some of what they earned. One has to enjoy life, too.

Appreciate thoughts from others on this topic. The comp model they have going is one of the drawbacks of owning this stock.

Best,
–Kevin

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Kevin you beat me to the send button, but I was just going to post that INFN is, in my opinion and the opinion of others that have held the stock for years, very extravagant with their stock based compensation.
I have tripled my investment in INFN and have considered selling some myself, so this is not, again in my opinion, that unusual. It has been a long time coming and they very well may be just taking some of that deferred compensation.

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Just to follow up on this for a little more color and context, Ita Brennan was Infinera’s CFO. After a brief stint with a start up with Jandeep Singh (Infinera’s former co-founder and serial entrepreneur), she’s now at Arista and took the CFO job there. This was announced shortly after Infinera and Arista announced a technology partnership. We can speculate on what this could mean on a different thread.

My point to make here is that Ita no longer works at Infinera, and thus, no longer gets access to stock based comp.

Looking at Ita’s direct holdings she has retained all of her shares since leaving the company:

http://finance.nbcconnecticut.com/what-are-ita-brennans-shar…

Ita isn’t selling, so maybe we shouldn’t either.

Thoughts?

–Kevin

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It is unfortunate they felt the need to sell

The tax treatment around shares from incentive options almost make it a requirement to sell at least a significant chunk immediately to make sure the taxes are covered, as they’re based on the price at time of exercise. People went bankrupt during the dot-com bust owing massive tax bills on their near worthless stock.

Here’s an excerpt from one example article:

The culprit was a thing called the Alternative Minimum Tax (“AMT”). The AMT is a complex set of rules that even tax practitioners have a hard time understanding. In essence, it works like this:

An employee buys $500,000 worth of stock, paying the bargain basement price of $10,000. For AMT purposes, the person has just received $490,000 of taxable income (the discount between what they paid and what they received). The person files their taxes and has a large tax bill as a result. Then the market drops. The stock becomes worthless. The key here is that the stock losses do not offset the earlier tax gain. The person is stuck with a large bill even though they have nothing to show for it. And unless plenty of other savings are on hand, the person may have no way to pay the bill.

During the dot com hangover, the above scenario played out for a number of unfortunate victims, many of whom began living in a tax nightmare. According to ReformAMT, an advocacy group, a number of them lost their homes and retirement savings, filed for bankruptcy, left the country, got divorced, even committed suicide.

http://blog.sfgate.com/dgreenberg/2012/06/22/tax-advice-from…

People who lived through the dot-com bust don’t make that mistake anymore. You always sell immediately – at least enough to cover the tax bill.

Neil

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Neil,

Thank you for that insight! The historical stock sales I’ve seen make a lot more sense.

Echoing what has already been said, the execs at Infinera are paid fairly modest salaries to the tune of $200-$400K with the CEO being at the top end. Last year Tom Fallon had a salary of $400K bolstered by $2M in stock comp.

In the case of Tom Fallon, his entire take-home pay for the year would have been needed just to pay off the ISO tax bill. It all makes perfect sense to me now.

Here is a view of Tom Fallon’s total pay package over the years:

http://finance.nbcconnecticut.com/how-much-money-did-thomas-…

Cheers!
–Kevin

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Hi Putnid. Here’s what Supernova said on April 16 when they sold a third of AMBA. If you don’t see an exact parallel with what you are saying, that’s not my problem. All I can do is post it.

Saul

By the way, AMBA just posted a huge beat with revenue up 73%, adjusted earnings up almost 200%, increased margins, etc. So much for insider selling.

Here’s Supernova’s rational for selling:

What’s the Hurry?
There has been a lot of insider selling ever since the company went public in fall 2012. Normally, I don’t pay too much attention to this. As the popular wisdom goes, insiders sell for many reasons. However, the scale and pace of these sales raised an alarm in my mind.

When Rule Breakers recommended Ambarella in September 2013, co-founder and CEO Fermi Wang owned 1.2 million shares, which represented 4.4% of the company, according to filings tracked by S&P Capital IQ. Today, he owns just 141,158 shares, less than 0.5% of the company.

Both of the other two co-founders (Leslie Kohn and Didier LeGall) have also significantly reduced their holdings. And CFO George Laplante is down by more than 50% from his highest level.

Despite launching a 43-post discussion on RB’s Ambarella board, I still haven’t found a satisfactory reason why these upper-level insiders have sold so much of their stakes. Possibly they were cashing out to secure their own wealth, rather than leaving that to the vagaries of the market. I can see that, but the counter thought is that owning and operating a business is one of the best ways to become very wealthy (Steve Jobs didn’t start out rich). Therefore, why limit yourself by selling roughly 90% of your original holdings, as Wang has done?

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Many thanks for all those posts
. I now know a lot more about insider sales.
Insider selling has never bothered me much because there are many reasons for insiders to sell ranging from a messy divorce to a desire to diversify .

It’s very risky to have your salary and all your net worth in the same company. Elon Musk does it (albeit three related companies) but most executives aren’t that confident. Or in control as much as Musk.