Famed money manager Peter Lynch gave us the inside scoop on how to look at insider transactions. Executives can sell their stock for any reason, he said, but they only buy for one: They think the price is going to go up!
Yet sometimes insider selling can influence investor sentiment. Below we highlight a handful of insiders who are selling big blocs of their own company's stock in the last week and we'll see if there is something to be gleaned from the move. We'll then pair that information with insights from the members of Motley Fool CAPS to see if they think the stock has the same prospects the insiders do.
Market Value of Transactions
(out of 5)
|Blackstone Group (NYSE: BX )
||Hamilton James, president
|Covidien (NYSE: COV )
||Richard Meelia, CEO
|The Fresh Market (NYSE: TFM )
||Brett Berry, director
Source: wsj.com; Motley Fool CAPS.
Although following the lead of insiders can be profitable, we still recommend you do further due diligence to determine whether these stocks ought to be sold from your own portfolio -- or would make a good addition! So this isn't a list of stocks to sell or buy, but just the inside track on companies you might want to check out further.
A toy story
The stronger economy is benefiting not only U.S. businesses, but also the private equity firms that invested in them. Blackstone Group is trading 32% higher in 2011 and Kohlberg Kravis Roberts (NYSE: KKR ) is up some 28% year to date.
They're also finding it an opportune time to sell off some of their assets and take advantage of the better feelings. Blackstone is putting chip maker Freescale Semiconductor back on the market five years after it bought it with a consortium of investors for $17.6 billion in what became the biggest private equity buyout in history.
It was also a big loser for the company, since the investors saddled the company with onerous debt. Of course, that's the way these deals are often structured, making sure the private equity firms get their payday regardless of what happens to the company. Even Blackstone's IPO made sure insiders got paid and Warren Buffett has criticized private equity firms like Blackstone, saying they're only in it for the money.
Of course, not everyone is successful at the game, as Fortress Investment Group (NYSE: FIG ) is proving. Its shares still lag the market and its peers by a considerable amount. But Hamilton James might be selling out of Blackstone right now because he sees traditional LBOs as being out of favor right now. There probably aren't too many companies that want to be loaded down with debt like Freecycle was. Despite strong earnings gains this past quarter, Blackstone's private equity unit actual saw revenues fall. They're finding it difficult to compete against companies that have large sums of cash sitting on their balance sheets.
With almost 1,100 CAPS members weighing in, 85% think it will beat the indexes. Tell us on the Blackstone Group CAPS page if you think it's still got the money to play.
Profiting at the margins
Covidien's estimate-beating performance last quarter has helped keep the momentum going on its stock's rise, but the higher revenues it earned came at the expense of some of its partners, like Zalicus (Nasdaq: ZLCS ) , which counts on Covidien to market its pain reliever drug Exalgo. This quarter, because of Covidien's rebate program, Zalicus actually saw lower revenues despite this being the fourth quarter the drug was on the market.
Covidien's sales were 10% higher, rising above $2.8 billion as profits improved by 9%, but overall its pharmaceutical division saw a 4% drop in sales because of harsh price competition. The big stock sale by Covidien's CEO probably has more to do with his decision to retire in July than anything behind the company.
Some 97% of the CAPS members rating Covidien apparently don't think it's a good time to sell, since they rate the medical device and drug developer and marketer to outperform the broad market averages. Add it to your watchlist to see if it's a stock worth retiring with.
A transforming event
It's not just Brett Berry cashing in on The Fresh Market, but also his father, Ray Berry, who dumped over $121 million in stock. The organic produce purveyor only recently went public, but announced a secondary offering that limited the participation to just certain insiders, namely the Berrys. Woohoo! Payday!
While this certainly gives the appearance of being a money grab by insiders, for investors it doesn't necessarily signal anything wrong with the company. However, while it is one of only two pure plays in the organic produce business (the other being Whole Foods Market (Nasdaq: WFM ) ), rising gas costs may eat into the pocketbooks of even the wealthy who likely make up a good portion of the customer base, and supermarkets from Kroger to Safeway have introduced greater percentages of organic goods. These are challenges The Fresh Market needs to overcome, and the Berrys' making sure they get a good portion of their money upfront as they did doesn't instill confidence.
CAPS member FoolishFinds thinks the market ought to be big enough for two very green grocers:
TFM has a great strategy as far as what products they offer. Whole Foods stock has been doing very well over recent history so hopefully the competition can gain some steam to help this market grow
Tell us on the The Fresh Market CAPS page whether the stock will wilt in the aftermath of the sale.
On the inside track
Following insiders can be a path to profits, but it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Sign up today for the completely free service, and tell us whether it's worth trading on this inside information.