Shares of GT Advanced Technologies (NASDAQ: GTAT) are up sharply in 2014, around 83%, after reaching even higher -- almost 120% -- back in March, and insiders are capitalizing, having sold some $32 million worth of shares already this year. The thing is, insiders only sold a total of $1.1 million in shares all of 2013.
Is this an indication that insiders are expecting the stock to tumble? Is it time to move on, and maybe invest in a company like SolarCity (SCTY +0.00%), which is growing like crazy, and has Elon Musk -- who holds more than 20% of the company -- as the largest shareholder? Let's dig in, and see what we can learn about all this insider activity.
Peeling back the layers
One of the great things about being an investor today is how easy it is to get information. This can also be one of the worst things about being an investor today. The bottom line is, too much data can be dangerous if you don't understand what it means. Insider buying and selling is one area that can be easily misunderstood. Let's take GT Advanced's CEO Tom Gutierrez, for example.
Sapphire is just one of many great technologies in GT's lineup. Source: GTAT
So far in 2014, he's sold some $9.2 million in stock, after selling only enough shares to satisfy tax withholding -- around $600,000 -- for options that he received in 2013. It's pretty clear that Gutierrez considered the shares, which traded as low as $2.66 last year, to be quite undervalued based on the potential for the business. Since he was able to sell those shares in March for as much as $17.27, it's pretty clear that holding out was definitely the best call for his personal wealth. But that doesn't answer the question: Is it time to get out? If he's so confident in the company, why not wait even longer? It's not that simple.
A little more context
Here's some personal insight. My wife works for a large company that uses stock grants to attract highly qualified people. It's a fantastic company, a leader in its industry, and growing quickly. This is the kind of company that has turned janitors into millionaires, and the stock is a great long-term investment. However, when my wife's stock grant comes up next year, we'll probably sell 75% of the shares. The reason why is simple: Financial diversification.
If we were to sell 30% of her grant to cover federal, state, and local taxes, keeping the other 70%, our financial stake in my wife's employer would be somewhere around 25% of our portfolio, and that's before the grants come due in 2016 and 2017. Simply put, as great as my wife's employer is, neither of us are comfortable with that many of our financial eggs in the same basket.
As it says on one of Gutierrez' Form 4 submissions, "This transaction was effected pursuant to a Rule 10b5-1 Plan adopted by reporting person on March 14, 2014 in order to implement a plan of financial diversification." I can understand that.
Insider sales at SolarCity
SolarCity CEO and co-founder Lyndon Rive has sold some $14 million in shares this year, while brother Peter, also a co-founder and SolarCity's COO and CTO, sold $2.2 million in shares in 2014, and you don't hear many people shouting that SolarCity is in trouble. After all, the company is projecting it will install more than double as much solar capacity in 2014 as it did a year ago, and that it could double that number in 2015. Add in that the business is largely built on a model of long-term contracts -- as in 20 years -- and retained value of these contracts, and this is a company that's being built for the long haul.
REC Group's manufacturing is in Singapore, and not subject to the recent tariffs. Source: REC
There is some concern around the recent announcement that Chinese-manufactured solar panels will now face a tariff of between 18% and 32%. This will increase costs for SolarCity and other installers, which use less-expensive panels such as those from China, versus competitors whose panels are made anywhere else. I'm not convinced that this will change the landscape that much, because many of SolarCity's smaller competitors are using similar panels, and will face the same cost increases. More efficient panels, like those made by SunPower, simply cost more already, and won't necessarily become more competitive for most residential installations.
SolarCity is already responding to the potential for cost increases in Chinese-made panels, just announcing an agreement with Norwegian REC Group to buy as many as 240 MW worth of solar panels. With its panels being trade-compliant (and thus tariff-free), this could help SolarCity continue to add to its bottom line and move toward profitability.
Focus on the business, and don't mistake compensation from investments
As with my wife's stock grants, insiders often get stock as part of their compensation. Some choose to sell a lot, while others choose to keep most and only sell enough to cover taxes. The bottom line is that these stocks are a form of income, paid for performance, and not shares that any of these insiders bought.
The key for both SolarCity and GT Advanced shareholders is to keep focusing on the business results. GT has really enhanced its offerings, and as solar manufacturers look for ways to increase panel efficiency and reduce costs, it's well-positioned to benefit. For SolarCity, the story is still about growing its installed base -- especially PPA and lease agreements -- and expanding into new markets.
And all those shares our insiders have sold? Don't forget: they all have more stock grants coming. They're still personally invested in success.
