Watch Out For Insiders Who Say One Thing, Do Another

by Ethan Roberts | August 6, 2012 1:16 pm

On July 17, Packaging Corp of America (NYSE:PKG[1]) insiders stood before a group of stock analysts and very enthusiastically reported on their second-quarter earnings and results[2], while predicting even better results ahead. The executives at the meeting were:

Mark W. Kowlzan — Chief Executive Officer and Director
Richard B. West — Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Paul T. Stecko — Executive Chairman
Thomas A. Hassfurther — Executive Vice President of Corrugated Products

Mr. Kowlzan told the group of analysts that PKG had just produced record quarterly earnings of 49 cents per share, and that net sales were a record $712 million, up some 7% year-over-year from 2011. Said Kowlzan:

“Overall, we had another strong quarter setting several records and generating earnings, excluding special items, $0.04 per share better than the earnings guidance we provided on April 17.”

He then predicted third-quarter 2012 earnings would be above 54 cents per share. Of course, as Kowlzan concluded his remarks, he covered himself by adding the usual caveat:

“I must remind you that some of the statements we have made on this call constitute forward-looking statements. These statements are based on current estimates, expectations and projections of the company and involve inherent risks and uncertainties, including the direction of the economy and those identified as risk factors on our annual report on Form 10-K on file with the SEC. Actual results could differ materially from those expressed in these forward-looking statements. And finally, we will not comment or respond to any questions concerning forward pricing on today’s call.”

Reversal of Fortune?

Yet just one week later, these same four insiders — plus two others in PKG — sold a large number of their company shares on the open market. This leads me to wonder what’s going on here. Why are the analysts being showered with unbridled enthusiasm, yet insiders are soon thereafter dumping their shares?

Let’s take a closer look at the recent insider selling.

On July 24, four different company insiders sold almost $3.2 Million of PKG stock at $30 per share. The sales were:

Insider Shares Type Transaction Value
Kent Pflederer[3], Officer 4,160 Direct Sale @ $29.99/share $124,758
Thomas Hassfurther[4], Officer 9,360 Direct Sale @ $30/share $280,000
Stephen Calhoun[5], Officer 7,800 Direct Sale @ $30/share $234,000
Mark Kowlzan[6], Officer 11,393 Direct Sale @ $30/share $341,790
Richard West[7], Officer 11,393 Direct Sale @ $30/share $341,790
Paul Stecko[8], Officer 62,400 Direct Sale @ $30/share $1,872,000

Three days later, Mr. Hassfuther had an automatic sale of shares totaling $310,000, bringing the total number of PGK insider shares sold that week to $3.5 million.

Some Selling is Noteworthy

As I have discussed here before, selling by one corporate insider is meaningless, but when a large group of insiders begins to sell, that is much more significant[9]. Since most insiders are well-aware of the current valuation of their stock by historical standards, large sales by multiple insiders should be seen by investors as a red flag.

This sale in particular is quite interesting, and one that begs for further examination. If the company’s future prospects are so positive, why would six company insiders sell a large numbers of shares the very next week? And if they are simply disposing of stock at regular intervals, no matter what the price or prospects, why would Mr. Hassfurther sell over $280,000 worth of stock only three days before his automatic sale of $310,000 also was due to kick in?

There also is a historical precedence at PKG. These same insiders also were selling in late February and early March just below $30 a share. A few weeks later, PKG stock declined about 16% to $25 per share.

Even if their motives were pure, how can an investor have faith and trust in the integrity of a company whose management says one thing one week and does another the following?

Click to Enlarge
The company’s weekly chart looks positive. The stock price has meandered up from $21.28 to its current price of $30.85 over the past 12 months, a gain of nearly 45%. One cannot fault company insiders from wanting to lock in some profits with those kinds of gains.

Nor am I suggesting that these insiders should have divulged to the analysts their plans for selling soon. That would have been irresponsible and could cause the stock price to plummet.

However, even if they are routinely selling shares every few months, for the sake of company integrity it would behoove them to wait longer than one week after the analyst meetings to do so.

If history is a guide, it’s quite possible that we are now seeing the highs in this stock for the immediate future, and investors are likely to be able to buy shares at lower prices in a month or two from now.

If there is a lesson here for investors to learn, it’s to always watch the insider buying and selling — and to take the fancy “packaging” to the analysts with a grain of salt.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

  1. PKG:
  2. second-quarter earnings and results:
  3. Kent Pflederer:
  4. Thomas Hassfurther:
  5. Stephen Calhoun:
  6. Mark Kowlzan:
  7. Richard West:
  8. Paul Stecko:
  9. that is much more significant:

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