The last time I waxed poetic over the business prospects of longtime Stock Advisor recommendation Netflix (NASDAQ:NFLX), a couple of skeptical readers raised an interesting question: Why is CEO Reed Hastings selling so much of his Netflix stock?
Let's have a look-see at the numbers, shall we?
At the start of 2009, Hastings held the equivalent of about 2 million shares in his own company, mostly in the form of stock options. One year later, he's down to 1.6 million shares, moving his ownership of the company down from 3.5% to 2.9%. Based on these naked facts, you could easily jump to the conclusion that Hastings is sensing a sinking ship, cashing out his options in a hurry while the getting is good.
But that's not the whole story. Every week, all year long, and always on a Thursday if the stock market was open for business on that day, Hastings converted 45 options contracts into 4,500 shares of stock, which were then sold on the open market. While Hastings did reduce his ownership stake in Netflix, this was by no means a panic-stricken cash-out move. Thanks to an average share price of about $55 (up from roughly $32 in 2008), Hastings supplemented his million-dollar paycheck with $10.1 million in share-based cash last year.
Reed Hastings remains committed to Netflix, and I don't see his income-padding sales as any reason to lose faith in the company. I'm more concerned when CEOs sell out half of their holdings or more in one fell swoop, especially after a huge run-up in the stock price.
Cautionary tales of that caliber include flash-memory drive expert STEC (NASDAQ:STEC), clothing retailer J. Crew Group (NYSE:JCG), and hotelier Wynn Resorts (NASDAQ:WYNN), all of which saw their leaders selling massive chunks of their holdings last year. Small-cap STEC was immediately punished on the open market for this exhibition of low management confidence.
I don't expect management to buy more shares as their company's stock price rises to the stars -- since many of them get stock options anyway, that's just bad money management. Would I prefer to see CEOs sitting on their treasure troves forever, like Warren Buffett of Berkshire Hathaway (NYSE:BRK-B), Jeff Bezos of Amazon.com (NASDAQ:AMZN), and Steve Ballmer at Microsoft (NASDAQ:MSFT) do? Sure, but I don't have a problem with leaders reaping some of the fruits of their labor.
Hastings is A-OK in my book. Let me know how you feel in the comments below.
