Insider Selling Could Spell Bad News for These 3 Stocks
Company insiders sell their own stock for a variety of reasons. Some do so for portfolio management reasons, such as the desire to diversify their portfolio. Others, see stock grants as a part of their salary and therefore cash them in to pay the mortgage, or for their child's tuition.
That said, there is another reason insiders sell that's a bit more worrisome for outside investors, and that's when it appears that the sale is fueled by some inside knowledge.
Here are three recent insider sales that caught our eye.
Adam Galas: Diamondback Energy Inc is one stock investors may want to steer clear of based on rampant insider selling. In fact, over the past year, management has unloaded 75% of its shares, including $51.5 million worth over just the last three months. As of October 1, insiders now own just 0.15% of the company.
Looking at Diamondback's operations, I can understand why management doesn't want to own shares. For one thing, in the past quarter, it only had 40% of its oil production hedged. Yet the company continued to expend vast amounts of money in order to increase oil production 90% year over year despite oil prices being in the toilet -- and showing no signs of recovering anytime soon.
To be honest, I'm baffled at management's strategy given that, according to Travis Stice, Diamondback's CEO, the company is focused on minimizing costs, not accelerating spending until oil prices rebound, and avoiding "growth for growth's sake," yet that's exactly what it's doing.
What's even worse is that the company is diluting investors to help fund its perplexing growth strategy despite having $490 million in available borrowing power under its credit revolvers. In fact, just in 2015, Diamondback Energy issued $651 million in new shares, diluting existing investors by 17%.
With insiders having almost no skin in the game anymore, I would expect even more equity sales in the future, and thus recommend that investors follow management's lead by not owning shares in Diamondback Energy.
Matt DiLallo: Earlier this fall, famed oilman T. Boone Pickens sold a big chunk of his investment in Clean Energy Fuels . This sale raises questions because of Pickens' close relationship to the company, having founded the predecessor to Clean Energy Fuels in 1997, as well as the fact that he remains a member of the board and its largest shareholder.
While we don't know why he chose to sell when he did, we do know the sale wasn't intended to cash in at the top, given that shares have been pummeled over the past year.
Instead, it is timing that the market read as reflective of his diminished confidence in the company's future prospects. While the company and Pickens both issued statements to the contrary, the market tends to ignore PR statements and instead reads into the actions.
The overriding concern is that with oil prices plunging, it will be much harder for the company to drive growth considering that one of its main selling points is that natural gas is a cheaper alternative fuel than diesel. While natural gas still remains cheaper on a relative basis, it was high diesel prices that were fueling the switch to gas. That's now a much tougher sell, and when combined with the overhang of the Pickens' sale, it will likely weigh on Clean Energy's stock until either oil prices rebound, or the company delivers visible growth amid lower prices.
Dan Caplinger: Most investors looking at insider-selling figures focus on executives with direct knowledge of the business. Yet an often-overlooked source of insider selling is equally important, and Builders FirstSource saw a huge sale in November with implications for its future.
The building-products specialist saw its shares skyrocket earlier this year when the company announced it would acquire larger rival ProBuild for $1.63 billion in cash. Since the deal closed in July, the newly leveraged Builders FirstSource has taken full advantage of the purchase to streamline its manufacturing and distribution as the two businesses have complemented each other in a way that has allowed a relatively smooth integration.
In mid-November, Builders FirstSource announced a secondary offering of stock. Yet unlike many secondaries, the company itself didn't offer any shares. Rather, hedge fund Warburg Pincus Private Equity IX sold 7 million shares of stock for $13.25 per share, raising about $92.75 million for the hedge fund.
Given the stock's big move, the hedge fund's decision to cash in on some of its profits makes sense, especially since the fund retains a position of more than 13 million shares. Nevertheless, for those hoping for further upward momentum, Builders FirstSource could have a harder time pushing far above the offering price until investors get restored confidence in the company's potential for further gains.
The article Insider Selling Could Spell Bad News for These 3 Stocks originally appeared on Fool.com.
Adam Galas has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Clean Energy Fuels. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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