When officers and directors decide to buy their company's stock with their own cash, it's invariably seen as a bullish sign for shares. Yet when they decide to sell, investors need not necessarily be overly concerned. Perhaps shares have had a nice run and a little profit-taking by insiders is to be expected. Or maybe a few shares need to be sold to fund this month's mortgage payment. But when insiders dump large amounts of stock, even as that stock is racing toward the 52-week low, then investors should follow their lead and head for the exit as well. That's just what happened with Micron Technology ( MU ) on Friday, pushing shares down -6%.
During the past few days, it had become apparent that Micron's chairman and chief executive officer ( CEO ) Steven Appleton, along with the company's president and two other insiders, collectively sold more than $1 million worth of stock on Wednesday, even after shares had been drifting steadily lower in recent weeks. While those insider sales amounted to 143,000 shares, "outside" investors voted with their feet Friday as more than 60 million shares changed hands.
On the upswing
By all accounts, Micron's business is on the upswing. Sales and profits have surged in recent quarters, and Micron is on track to earn nearly $2 a share in the fiscal year ended August. That would be a company record. The company has pulled off a series of moves in recent months that will lighten expenses and diversify the customer base. For example, selling a 50% interest in a key Asian manufacturing facility should net Micron a $450 million cash infusion in August, bolstering an already-growing cash balance. Moreover, Intel (Nasdaq: INTC) announced earlier this month that demand for computers (which consume a lot of Micron's memory chips) is really taking off, setting the stage for robust chip sales into 2011.
To be fair, all kinds of chip stocks are buckling under this week. Integrated Silicon Solutions (Nasdaq: ISSI) fell sharply on Thursday on no apparent news, while other chip makers such as Cypress Semiconductor (Nasdaq: CYPS) and Xilinx (Nasdaq: XLNX) traded lower by lesser amounts. So this may be more about investor queasiness about tech spending than any actual negative industry actions taking place.
But none of that bullish commentary matters if management acts so bearishly.
Action to Take --> Insiders at Micron may have unwittingly touched off misplaced fears that business is turning south. Sales and profit trends may indeed still be on the mend from the nadir of the economic crisis, but no matter how bullish Micron and its peers sound on the next round of conference calls, heavy insider selling may still be the most salient message to investors.
Micron's trading action highlights an important step for investors: before buying, check out the latest insider moves. If you're looking at purchasing a stock and insiders are selling even as the stock is approaching lows, then hold off on that "Buy" order. And as in the case with Micron, when it's a cluster of insiders who are selling, be very leery.
Insiders must file a copy of their activities with the U.S. Securities and Exchange Commission ( SEC ) . You can track their moves at SEC.Gov under the category "Filings and Forms." Several websites, including insiderinsights.com and edgar-online.com also track these transactions.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two decades. He started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and has made numerous media appearances over the years, primarily on CNBC and Bloomberg TV. David has a master's degree in management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.