THE WALL STREET JOURNAL
Sunday, June 8, 2003
Here's some cold water for a red-hot stock market: Executives are rushing to sell their companies' shares at a pace not seen since 2001.
More than $3.1 billion in shares was sold in May by corporate insiders, the most such selling in 24 months. By comparison, monthly stock sales by insiders failed to exceed $1.4 billion during each of the previous five months, and just $630 million of sales took place in January, according to research firm Thomson Financial.
The moves are a concern because insider buying and selling -- by people who presumably are the most knowledgeable about their companies' prospects -- have been good predictors of the market's direction. For example, many executives sold their holdings in early 2000, just before a bear market in stocks began. Now, many again are locking in profits -- especially in health care, technology and finance stocks -- on the heels of the market's recent gains.
Some argue that investors shouldn't worry about the rash of selling. After all, executives were scarred by the bear market like everyone else, and may be selling because they don't trust that the market's rally will last rather than because bad earnings news is around the bend.
Still, the selling -- from such savvy executives as Microsoft Corp.'s chief executive, Steven Ballmer, and Dell Computer Corp. Chairman Michael Dell, among others -- could portend trouble for earnings.
Because of changes in corporate disclosure rules, insider selling may be more important an indicator than ever. New regulations imposed in the past year or so mean executives are much less able to share information with analysts about early signs of how a quarter or year is shaping up. As such, trading by executives is one of the few ways left for investors to get an inside look at how companies feel about their prospects, some argue. How they vote with their feet is what is key, these people say.
Dell sold almost $300 million in shares in late May, compared with more than $120 million of shares sold during all of last year. His wife, Susan Dell, sold another 1 million shares, for $31.1 million.
Mike Maher, a Dell spokesman, said he couldn't comment on the sales and pointed out that Michael Dell remains the largest holder of the company's stock, with almost $9 billion in shares and options. His family owns an additional $1.2 billion of the stock. But Dell in the past has bought shares when he thought they were cheap, according to an executive close to him, and sold them when he viewed the shares as expensive. This could suggest that his recent move stems from a belief that the company's recent runup may not be warranted.
Dell sold his shares at prices of $29.56 to $30.01; on Friday, shares dropped 58 cents to $31.35 in Nasdaq trading. Other Dell officials, including Chief Operating Officer Kevin Rollins and Chief Financial Officer James Schneider, also sold shares recently.
As for Ballmer, who has sold almost $1 billion in shares recently, he issued a press release last month saying, "I remain excited about the potential for our technology to change people's lives, and I remain as committed to Microsoft as ever." A Microsoft spokeswoman added that Ballmer continues to hold significant holdings of the company's shares. He currently holds about $10 billion of Microsoft shares.
Ballmer sold his shares at $23.89 to $24.90; on Friday, Microsoft stock dropped 42 cents to 23.67 on the Nasdaq.
Microsoft founder Bill Gates has been a prolific seller of his shares for years. He has sold nearly $1 billion of Microsoft stock this year, according to data compiled by Washington Service.
Some analysts say insider moves are an increasingly important indicator. "Who better than directors to know what their companies' near-term profits outlook is like?" says Bijal Shah, senior equity strategist for Société Générale, the big French bank. "Directors tend to sell stock in their own companies if they believe their company will miss analysts' forecasts and buy if they believe it will beat forecasts. . . . The ratio of directors selling relative to directors buying is an excellent indicator of the outlook for company profits."
By that measure, the current selloff is indeed worrisome. On the 14 occasions when there has been as much selling relative to buying as in the past month, the Standard & Poor's 500 stock index has on average fallen 6 percent in the subsequent six months and 9 percent in the following year, says Lon Gerber, director of insider research at Thomson Financial. (So far this year, the S&P 500 is up about 10 percent.)
Other experts are less concerned about the insider selling. Executives sell stock for all kinds of reasons. Some need to raise money for various expenses, while others simply try to diversify their holdings. Indeed, many academics say stock purchases by executives, rather than their selling, are much better indicators of where earnings and the market are going. That's because the only reason an executive will buy shares is because the executive thinks they are likely to go up.
In addition, stock sales always pick up in May, as firms come out of first-quarter lockup periods in April, when executives are restricted from making moves. And with stocks coming out of a three-year bear market, executives have even more reason to sell. Many missed out on cashing in options before and during the downturn, or are just nervous about the market's outlook.
"Executives have just experienced the same bear market we have" and aren't above getting nervous about the stock market like other investors, says Chuck Zender, managing director of Leuthold Group in Minneapolis, a research firm. "You have to put more emphasis on their buying" rather than their selling.
The overall figures on executive stock sales actually are higher than they appear because Thomson Financial excludes any sales valued at more than $50 million -- such as those of Ballmer and Dell -- to prevent big sales from skewing overall figures.
Tech executives have long been among the biggest sellers of shares, in large part because they get so much of their pay in stock options compared with other industries.
Health-related companies stand out because of a surge in recent insider selling. For example, six executives at Genentech, a stock that has almost doubled this year, have combined to sell 742,500 shares valued at $36 million in the past month, according to Thomson. Among them, Chief Financial Officer Louis Lavigne Jr. sold almost 210,000 shares.
Coventry Health Care Inc., whose stock is up almost 50 percent this year, has also seen selling. Eight Coventry executives sold 454,000 shares in May.
Sunday, June 8, 2003
Here's some cold water for a red-hot stock market: Executives are rushing to sell their companies' shares at a pace not seen since 2001.
More than $3.1 billion in shares was sold in May by corporate insiders, the most such selling in 24 months. By comparison, monthly stock sales by insiders failed to exceed $1.4 billion during each of the previous five months, and just $630 million of sales took place in January, according to research firm Thomson Financial.
The moves are a concern because insider buying and selling -- by people who presumably are the most knowledgeable about their companies' prospects -- have been good predictors of the market's direction. For example, many executives sold their holdings in early 2000, just before a bear market in stocks began. Now, many again are locking in profits -- especially in health care, technology and finance stocks -- on the heels of the market's recent gains.
Some argue that investors shouldn't worry about the rash of selling. After all, executives were scarred by the bear market like everyone else, and may be selling because they don't trust that the market's rally will last rather than because bad earnings news is around the bend.
Still, the selling -- from such savvy executives as Microsoft Corp.'s chief executive, Steven Ballmer, and Dell Computer Corp. Chairman Michael Dell, among others -- could portend trouble for earnings.
Because of changes in corporate disclosure rules, insider selling may be more important an indicator than ever. New regulations imposed in the past year or so mean executives are much less able to share information with analysts about early signs of how a quarter or year is shaping up. As such, trading by executives is one of the few ways left for investors to get an inside look at how companies feel about their prospects, some argue. How they vote with their feet is what is key, these people say.
Dell sold almost $300 million in shares in late May, compared with more than $120 million of shares sold during all of last year. His wife, Susan Dell, sold another 1 million shares, for $31.1 million.
Mike Maher, a Dell spokesman, said he couldn't comment on the sales and pointed out that Michael Dell remains the largest holder of the company's stock, with almost $9 billion in shares and options. His family owns an additional $1.2 billion of the stock. But Dell in the past has bought shares when he thought they were cheap, according to an executive close to him, and sold them when he viewed the shares as expensive. This could suggest that his recent move stems from a belief that the company's recent runup may not be warranted.
Dell sold his shares at prices of $29.56 to $30.01; on Friday, shares dropped 58 cents to $31.35 in Nasdaq trading. Other Dell officials, including Chief Operating Officer Kevin Rollins and Chief Financial Officer James Schneider, also sold shares recently.
As for Ballmer, who has sold almost $1 billion in shares recently, he issued a press release last month saying, "I remain excited about the potential for our technology to change people's lives, and I remain as committed to Microsoft as ever." A Microsoft spokeswoman added that Ballmer continues to hold significant holdings of the company's shares. He currently holds about $10 billion of Microsoft shares.
Ballmer sold his shares at $23.89 to $24.90; on Friday, Microsoft stock dropped 42 cents to 23.67 on the Nasdaq.
Microsoft founder Bill Gates has been a prolific seller of his shares for years. He has sold nearly $1 billion of Microsoft stock this year, according to data compiled by Washington Service.
Some analysts say insider moves are an increasingly important indicator. "Who better than directors to know what their companies' near-term profits outlook is like?" says Bijal Shah, senior equity strategist for Société Générale, the big French bank. "Directors tend to sell stock in their own companies if they believe their company will miss analysts' forecasts and buy if they believe it will beat forecasts. . . . The ratio of directors selling relative to directors buying is an excellent indicator of the outlook for company profits."
By that measure, the current selloff is indeed worrisome. On the 14 occasions when there has been as much selling relative to buying as in the past month, the Standard & Poor's 500 stock index has on average fallen 6 percent in the subsequent six months and 9 percent in the following year, says Lon Gerber, director of insider research at Thomson Financial. (So far this year, the S&P 500 is up about 10 percent.)
Other experts are less concerned about the insider selling. Executives sell stock for all kinds of reasons. Some need to raise money for various expenses, while others simply try to diversify their holdings. Indeed, many academics say stock purchases by executives, rather than their selling, are much better indicators of where earnings and the market are going. That's because the only reason an executive will buy shares is because the executive thinks they are likely to go up.
In addition, stock sales always pick up in May, as firms come out of first-quarter lockup periods in April, when executives are restricted from making moves. And with stocks coming out of a three-year bear market, executives have even more reason to sell. Many missed out on cashing in options before and during the downturn, or are just nervous about the market's outlook.
"Executives have just experienced the same bear market we have" and aren't above getting nervous about the stock market like other investors, says Chuck Zender, managing director of Leuthold Group in Minneapolis, a research firm. "You have to put more emphasis on their buying" rather than their selling.
The overall figures on executive stock sales actually are higher than they appear because Thomson Financial excludes any sales valued at more than $50 million -- such as those of Ballmer and Dell -- to prevent big sales from skewing overall figures.
Tech executives have long been among the biggest sellers of shares, in large part because they get so much of their pay in stock options compared with other industries.
Health-related companies stand out because of a surge in recent insider selling. For example, six executives at Genentech, a stock that has almost doubled this year, have combined to sell 742,500 shares valued at $36 million in the past month, according to Thomson. Among them, Chief Financial Officer Louis Lavigne Jr. sold almost 210,000 shares.
Coventry Health Care Inc., whose stock is up almost 50 percent this year, has also seen selling. Eight Coventry executives sold 454,000 shares in May.
