Last week, I focused on some noteworthy energy stocks with recent heavy insider buying. But as the Dow flirts with the 13,000 level, and the Nasdaq reaches levels not seen since the end of 2000, the ratio of insider selling to insider buying has been increasing rapidly in recent weeks, leading to red flags across various market sectors.
The insider sell-to-buy ratio is calculated by dividing the total insider sales by the total insider purchases in a single week. The adjusted ratio for last week increased to 33.3, from 20.8 the week before. So that that company insiders were selling 33 times as many shares as they were buying!
Today, I am going to identify three tech stocks with a significant recent increase of insider sales. These are not some little-known biotech or startup companies. These are three of the largest tech companies in America.
The first of these stocks is International Business Machines (NYSE:IBM). Within the past two weeks, the following insider sales have taken place:
- Jon C. Iwata, a senior vice president, sold 21,451 shares between $198.77 and $198.92, for a total of $4.3 million.
- Timothy S. Shaughnessy, another senior VP, sold 20,562 shares at $193.60, generating over $3.9 million from the sale.
- Officer Samuel Palmisano sold 250,000 shares at prices between $191.21 to $191.90, and garnered more than $48 million.
- Director Kenneth I. Chenault sold 4,000 shares at $192.50, collecting $770,012 from the sale.
- In addition, several insiders have been exercising highly profitable stock options within that same time frame.
Click to Enlarge Looking at the chart of IBM, the stock appears to be quite overextended from its $4 gap higher on Jan. 22, and the upside volume appears to be somewhat weaker than in previous months.
Another caveat is that the stock is now trading above the parameters of the upper Bollinger bands.
The second stock with recent insider activity is Microsoft (NASDAQ:MSFT). In the past 30 days, several insiders have been taking profits, including:
- Founder Bill Gates sold 10 million shares for $29.43, collecting $294.3 million from the sale.
- Satya Nadella, President, Server and Tools Business, sold 20,000 shares for $29.76, generating $595,200 from the sale.
- Kurt DelBene, President, Microsoft Office division, sold 70,628 shares at $30.52, for more than $2.1 million.
Gates’ transaction was simply an automatic sale, so I give it much less importance than the direct sales of other company insiders. Gates has automatic sales set up on a regular basis every few months. However, it’s noteworthy that Gates has not made a direct open-market purchase in several years now.
Click to Enlarge The Microsoft stock chart, while looking overbought at 75 on its RSI indicator, seems much stronger than IBM right now, and in fact has about tripled the return of IBM since the end of 2011.
Therefore, we will want to see some weakening of that stock before initiating puts, and those who are long on MSFT can simply hold and perhaps tighten stop-losses to just below the 50-day moving average at $28.50. As that moving average rises, you can adjust your stop accordingly.
The third tech stock showing recent insider sales is EMC Corp. (NYSE:EMC). Within the past three weeks:
- Chairman, President and CEO Joseph M. Tucci sold 396,415 shares at $26.25, generating $10.4 million from the sale. 336,415 of these shares were sold indirectly, and belong to a trust.
- Howard D. Elias, President & COO, sold 44,495 shares for $26.75, generating $1.2 million from the sale.
- David I. Goulden, Executive VP & CFO, sold 25,000 shares for $26.60, collecting $665,000 from the sale.
- Paul T. Dacier, Executive VP and General Counsel, sold 50,000 shares at $27.50 per share, for a total value of $1,375,000.
Click to EnlargeEMC gapped up above resistance on Feb. 24 and has not looked back since. The chart also appears strong, and although RSI and stochastic have been in overbought territory for awhile, the 50-day moving average appears ready to cross above the 200-day moving average — which would achieve the bullish “Golden Cross.”
With the stock acting so strongly, I would again recommend nothing more than maybe raising your stop-loss orders to just below the 50-day moving average, currently at $24.31. But some pullback is to be expected after a 28% run-up year-to-date, and perhaps that is why the insiders at EMC Corp. also are demonstrating caution at these levels.
How to Play a Decline
An alternative to selling, or even raising stops on your long positions, is to buy April 21 puts. For example, the April 21 IBM 190 strike is about $2.75 per contract (each contract controls 100 shares and would cost $275). So, $190 would only be about a 4% loss from current levels. Assuming you own the stock, you also could sell a covered call to offset a decline in price with income.
Remember that no stock should be bought or sold simply because of insider buying or selling. You also should evaluate all stock investment decisions according to fundamental and or technical analysis. However, if your evaluation indicates that a stock’s future upside might be limited, and a recent pattern of insider selling is evident, then it might be time to consider selling your shares or adding options to hedge or generate income against a loss.
Ethan Roberts recently purchased call options on QID, which would benefit from a decline in the Nasdaq 100 stocks, such as MSFT. However, he does not hold a position in any of the aforementioned securities.
All insider transaction courtesy of Yahoo Finance and sinletter.com (Suria Investment Newsletter).