Stocks to Avoid Now?

If you're thinking of selling your stocks, you're not alone. According to insider tracker Form 4 Oracle, executives at these three firms cashed in shares last week:

The week's selling

Company

Closing Price, 2/26/09

Total Value Sold

52-Week Change

Alliance Data Systems (NYSE: ADS  )

$30.83

$1,261,750

(41.3%)

Amgen (Nasdaq: AMGN  )

$51.23

$4,981,863

7.1%

Stanley (NYSE: SXE  )

$30.10

$1,045,399

8.4%

Sources: Fool.com, Yahoo! Finance, Form 4 Oracle.

Insiders sell for many reasons, ranging from compensation to estate or tax planning to just plain getting out, but the reasons are rarely (if ever) given. Having said that, these are open-market sales, made by executives who have 100% control over the timing of their trades. Not so at priceline.com (Nasdaq: PCLN  ) and O'Reilly Automotive (Nasdaq: ORLY  ) , whose insiders have mostly been cashing in on a predetermined schedule known as a 10b5-1 trading plan.

Firms typically find their way to our list because those selling either (a) exhibit good timing, or (b) are dumping significant portions of their stakes. The former best describes Amgen chief executive Kevin Sharer. He last sold shares on the open market in November 2005 -- hundreds of thousands of shares, all at more than $80 apiece.

Yet he isn't the only one selling. In January, Amgen Chief Information Officer Thomas Flanagan dumped roughly one-third of the 10,000-plus shares he's sold since October. Seeing Sharer pile on isn't exactly encouraging, given his knack for taking profits at exactly the right time.

Will the stimulus destroy defense?
The Obama administration this week unveiled a budget that offers modest increases in defense spending in 2009, followed by sharp decreases in subsequent years.

Conventional wisdom says that this is awful news for the largest defense contractors, including Boeing (NYSE: BA  ) , Lockheed Martin (NYSE: LMT  ) , and any of the other stocks listed in this defense industry overview by Foolish colleague Rich Smith.

What's that? You want an idea now? Well, look no further than Stanley, an information technology services contractor to the nation's defense industry. Those who follow the stock in our 125,000-strong Motley Fool CAPS community have mixed feelings:

Metric

Stanley

CAPS stars (out of 5)

***

Total ratings

198

Percent bulls

93.5%

Percent bears

6.5%

Bullish pitches

33 out of 36

Data current as of Feb. 27, 2009.

And with good reason. Executives are cashing in stock just as Stanley is winning business and outperforming the Street's targets. 

For example, in November, the Marines signed a $119 million contract with Stanley to update their IT network and technology infrastructure. In January, Stanley topped analyst estimates for its fiscal third quarter by reporting 41% per-share earnings growth.

Yet, on Wednesday, board member James Hughes and company vice president Christopher Torti combined to cash in close to 35,000 shares. Four other executives have sold shares on the open market since the beginning of the month.

Bearish CAPS investor dollarbrain might say they have good timing. Quoting from dollarbrain’s early-November pitch:

Investors need to look forward when making decisions, not backwards. The market has already priced in Stanley's impressive results for this quarter, but has failed to see that there will likely be limitations to the company's growth going forward. With a P/E ratio of 27.6 [as of 11/1/08], the market is treating this like a high growth stock. Yet, looming on the horizon is an Obama government that will be looking to decrease defense spending in order to help pay for the government's recent handouts, as well as health care and other promises. So far this year, Stanley has received 71% of its revenue from the Department of Defense. This does not bode well for a company that has a high growth rate priced into its stock.

(Gulp.) There's your update. See you back here next week for more stocks you should consider avoiding.

Get the inside scoop on stocks of all sizes with related Foolishness:

Fool contributor Tim Beyers also writes for Motley Fool Rule Breakers. priceline.com is a Stock Advisor selection. Try either of these market-beating services free for 30 days.

Tim didn't own stock in any of the companies mentioned in this article at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool.

The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is the undisputed heavyweight champ among disclosure policies.


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