Company insiders sell their own stock for a variety of reasons. Some do so for portfolio management reasons, such as the desire to diversify their portfolio. Others, see stock grants as a part of their salary and therefore cash them in to pay the mortgage, or for their child's tuition.
That said, there is another reason insiders sell that's a bit more worrisome for outside investors, and that's when it appears that the sale is fueled by some inside knowledge.
Here are three recent insider sales that caught our eye.
Adam Galas: Diamondback Energy Inc (NASDAQ:FANG) is one stock investors may want to steer clear of based on rampant insider selling. In fact, over the past year, management has unloaded 75% of its shares, including $51.5 million worth over just the last three months. As of October 1, insiders now own just 0.15% of the company.
Looking at Diamondback's operations, I can understand why management doesn't want to own shares. For one thing, in the past quarter, it only had 40% of its oil production hedged. Yet the company continued to expend vast amounts of money in order to increase oil production 90% year over year despite oil prices being in the toilet -- and showing no signs of recovering anytime soon.
To be honest, I'm baffled at management's strategy given that, according to Travis Stice, Diamondback's CEO, the company is focused on minimizing costs, not accelerating spending until oil prices rebound, and avoiding "growth for growth's sake," yet that's exactly what it's doing.
What's even worse is that the company is diluting investors to help fund its perplexing growth strategy despite having $490 million in available borrowing power under its credit revolvers. In fact, just in 2015, Diamondback Energy issued $651 million in new shares, diluting existing investors by 17%.
With insiders having almost no skin in the game anymore, I would expect even more equity sales in the future, and thus recommend that investors follow management's lead by not owning shares in Diamondback Energy.
Matt DiLallo: Earlier this fall, famed oilman T. Boone Pickens sold a big chunk of his investment in Clean Energy Fuels (NASDAQ:CLNE). This sale raises questions because of Pickens' close relationship to the company, having founded the predecessor to Clean Energy Fuels in 1997, as well as the fact that he remains a member of the board and its largest shareholder.
The building-products specialist saw its shares skyrocket earlier this year when the company announced it would acquire larger rival ProBuild for $1.63 billion in cash. Since the deal closed in July, the newly leveraged Builders FirstSource has taken full advantage of the purchase to streamline its manufacturing and distribution as the two businesses have complemented each other in a way that has allowed a relatively smooth integration.
In mid-November, Builders FirstSource announced a secondary offering of stock. Yet unlike many secondaries, the company itself didn't offer any shares. Rather, hedge fund Warburg Pincus Private Equity IX sold 7 million shares of stock for $13.25 per share, raising about $92.75 million for the hedge fund.
Given the stock's big move, the hedge fund's decision to cash in on some of its profits makes sense, especially since the fund retains a position of more than 13 million shares. Nevertheless, for those hoping for further upward momentum, Builders FirstSource could have a harder time pushing far above the offering price until investors get restored confidence in the company's potential for further gains.
Adam Galas has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.
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