Is Vonage Finally Oversold?

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Is Vonage (NYSE: VG  ) headed higher, or lower? That's the question we ask when we evaluate insider buying and selling. We ask because how executives spend their paychecks is often a reflection of what they think of their companies' prospects.

Of course, not all buys are equal. According to two decades worth of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence from Insider Trading, buying is most predictive when (a) it comes from the CEO or other top-level executive, and (b) it's performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.

How do Vonage's managers measure up against Seyhun's benchmarks over the past year? See for yourself:

Insider Rating


Though only two board members have sold, they've dumped hundreds of thousands of shares at prices well below current.

Business description A leading supplier of Voice over IP services.
Recent price $2.51
CAPS stars (out of 5) *
Percentage of shares owned by insiders 25.01%
Net buying (selling)* ($3.25 million)
Last buyer (% increase) No purchases in the last 12 months.
Last seller (% decrease)

Jeffrey Citron, Founder and Chairman

4,400 shares at $2.35 apiece on Aug. 10, 2010.

(Reduced direct holdings by less than 1%.)


AT&T (NYSE: T  )

Sprint Nextel (NYSE: S  )

Verizon (NYSE: VZ  )

Sources Form 4 Oracle, Capital IQ, and Motley Fool CAPS. (Data current as of Nov. 24.)
*Open market sales and purchases only.

What we're tracking here, and why
Insider buying data can be confusing. Here, I'm concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times they're buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.

Those personal holdings matter the most -- they're the shares executives hold for investment, rather than compensation. Employee stock options are different; they're compensatory in the purest sense. I've stripped out options-related buying and selling from the calculations you see above.

The Foolish view: bearish
For many, Vonage is the growth story that never was. After more than doubling in 2005 and again in 2006, and rising another 36% in 2007, revenue growth has all but disappeared, a victim of competition from traditional telecoms, Skype, and emerging players such as 8x8 (Nasdaq: EGHT  ) and Google's (Nasdaq: GOOG  ) Voice service.

"Vonage is no longer specially or particularly attractive in VoIP space. When Vonage launched most Americans had no idea what VoIP was. Vonage cut landline costs roughly in half. Those days a long gone," wrote Foolish investor RetireOrExpire in June.

Bullish investors counter that Vonage has become more efficient under CEO Marc Lefar. Cash is flowing, they argue. They're right. Vonage has produced more than $100 million in free cash flow over the trailing 12 months, though more than 50% of that was derived from sources my Foolish colleague Seth Jayson calls questionable. I think he's right.

Regardless, I get little comfort from the insider action at Vonage. Why? Founder and Chairman Jeffrey Citron has sold hundreds of thousands of shares over the past year for "estate planning purposes," according to footnotes in his filed Form 4 disclosure statements. And he isn't the only seller. Since March, board member David Morton has sold 400,000 shares on the open market.

Valuation is the only thing that keeps me from shorting Vonage. Questionable or not, it's simply too dangerous to bet against a stock that trades for just 4 times cash flow.

Do you agree? Disagree? Log into Motley Fool CAPS today and tell us how you would rate Vonage. You can also add the stock to your watchlist.

And if you want me to take a Foolish peek at the insider action of your favorite stock, email me here or use the comments box below. I'll write this column as often as you, our readers, demand.

Both our Motley Fool Inside Value and Motley Fool Rule Breakers services have recommended subscribers buy shares of Google. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Google and is also on Twitter as @TheMotleyFool. Its disclosure policy has its eye on you.

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