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

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 Gilead Sciences (NASDAQ:GILD) and Morningstar (NASDAQ:MORN), whose insiders have mostly been cashing in on a predetermined schedule known as a 10b5-1 trading plan.

Firms typically find their way here because those selling either (a) exhibit good timing, or (b) are dumping significant portions of their stakes. Today's selling has almost everything to do with the latter. Yet many of these aren't controlled sales.

Take Heartland Payment Systems, a Motley Fool Hidden Gems pick that's taken a beating after joining General Electric (NYSE:GE) and Wells Fargo (NYSE:WFC), among others, in slashing its dividend. Heartland also suffered a security breach last year and is now facing an informal SEC inquiry.

The stock is down more than 75% year-to-date, forcing key insiders to sell to make broker margin calls. Over the past week alone, CEO Robert Carr and Chief Sales Officer Sanford Brown liquidated $5.7 million in personal holdings to make good on debts.

So this is one of those instances where the selling itself says nothing about the business. I'm nevertheless avoiding the stock. If management is exposed -- and the margin calls suggest that they are -- it's possible (likely?) that deteriorating market conditions will force more selling, and further depress the share price.

No longer FUN to own
Heartland isn't the only company facing the siren song of the margin call. One-time Motley Fool Income Investor recommendation Cedar Fair is, too, but in even greater volume. CEO Dick Kinzel was forced to part with 13% of his direct stake in the company, The Associated Press reports.

The bigger problem with Cedar Fair is that our 130,000-strong Motley Fool CAPS community isn't impressed by the underlying business:

Data current as of March 6, 2009.

"I worked on the business side of the amusement industry for a few years and one thing I learned is that debt is a killer. No one can dispute that Cedar Point is the finest coaster park in the world, but this stock is a no go," wrote CAPS investor aquabat63.

Fair point. Capital IQ reports that Cedar Fair's debt stands at an astounding six times equity. Rare is the firm that can sustain that sort of ratio and still yield 25% in dividends, as Cedar Fair does.

The math simply doesn't favor it. With $6.4 million in capital outlays, $17.5 million in required debt payments, and $105.1 million in dividends, Cedar Fair will have to work hard to keep its free cash flow of $138.5 million up in order not to become a cash burner without a dividend cut. I'm not so sure its cash flows are sustainable, especially in this economy. Not good.

There's your update. See you back here next week for more stocks you should avoid.

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