Texas-Size Insider Selling at Texas Instruments

by Ethan Roberts | February 7, 2013 12:05 pm

In Texas, it seems people do almost everything in a big way. So it’s not too surprising that at Texas Instruments (NASDAQ:TXN[1]), the Dallas-based semiconductor maker, insiders are now dumping shares in a big, big way.

Ten different insiders sold a total of 551,998 shares, worth over $18.2 million, in January. As I noted here recently[2], large numbers of insiders across the stock market are now selling, rather than buying shares of their company stock. This at least partly reflects a view among insiders that their own stocks may have run up a bit too much, and they’re looking for a pullback in price before repurchases are made.

Following is the complete list of the recent TXN sales, courtesy of sinletter.com. In addition, over the last week, Senior VPs Kevin J. Ritchie and John J. Szczsponik continued to sell. Ritchie sold 225,000 shares, worth $7.5 million, and Szczsponik sold 87,500 shares, worth $2.9 million, on Feb. 3.

Given these hefty sales, should investors also be looking for a pullback at TXN?

I’ve noted before that insider buying is a far more reliable indicator of future stock price direction than insider selling. Insiders buy shares because they believe their stock will appreciate in value. However, insiders may sell because they need money for a new house, a bigger boat, a fancy wedding or for retirement. While an expected drop in the stock price could be a motive at times, it’s simply one of many reasons for insiders to sell.

This Selling Is Noteworthy

One of the times to sit up and take notice of insider selling is when large numbers of company insiders are selling shares on the open market within a very short time frame. There can’t be that many insiders buying boats or paying for weddings all at the same time!

It’s entirely possible that insiders have discussed their company’s prospects over the next few months. Perhaps earnings won’t be strong enough to sustain the current stock valuation.

As investors, we won’t always know exactly what’s going on, but selling by so many insiders so close together must serve as a red flag and shake us out of a simple “buy and hold” complacency. If you’re long TXN, there’s absolutely no need to panic and sell all of your shares. But you can take a few prudent actions right now to hedge your position and minimize your future risks.

1) Put in an 8% trailing stop-loss order on TXN. At the current price of $33.28, the stop-loss would be set at $30.61. If the stock price increases, the stop-loss price will rise accordingly. Investors should feel free to tighten or loosen that stop loss to their own comfort level.

2) Write covered calls on TXN. For every 100 shares you own, you can write one covered call. This puts instant cash into your account, and if the stock declines, you can buy back the covered call at a much lower price, and then write another one at a different strike price or length of term. The loss of value from the stock price will be largely offset by the money you make on the covered call. At the moment, you can write an April covered call with a $35 strike price for about 62 cents, or $62 of cash for each 100 shares you own.

3) Use the cash collected from the covered call to buy puts as insurance against a decline. If you do this, you have less need to use a stop-loss order, because your puts should offset most or all of the losses of stock price. For example, you can buy April 19 puts with a $30 strike price for 31 cents each, or $31 per 100-share contract. If you own 100 shares and buy two puts for a total of $62, that would be an insurance policy of only 1.8% ($62 /$3,328) against a 10% or greater loss in the value of your shares.

Click to Enlarge
Looking at the accompanying TXN chart, you can see that the RSI, MACD and full stochastic oscillator are beginning to weaken, signifying that a price decline could be imminent. It would seem logical that a pullback in price might take the stock to at least $31.40, which is where we find the 50-day moving average.

A greater decline would take it back about $30.60, which is where the gap up occurred at the beginning of January. Below that, support would be at the 200-day moving average, currently $29.07.

Texas Instruments hasn’t generated any negative news recently, so perhaps the insiders are aware of something that will become known to the general public within a month or two. TXN currently has a P/E ratio of 21, the dividend yield is down to 2.5% and the stock has run up 24%, from $27 to over $33, since October 2012. Therefore, investors would be wise to begin hedging their bets as indicated in the strategies above.

That will help you prevent a Texas-size loss to your portfolio!

As of this writing, Ethan Roberts didn’t own any securities mentioned here.

  1. TXN: http://studio-5.financialcontent.com/investplace/quote?Symbol=TXN
  2. noted here recently: https://investorplace.com/2013/01/is-soaring-insider-selling-sending-a-signal/

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