This scary chart from the Washington Service provides a graphical view of the flight from equities by C level officers and directors. There has not been a time in recent years when insiders have unloaded as much stock as now. Insider selling is not as good an investment clue as buying but still one has to wonder. Shouldn’t you be a little wary of buying the very stock those insiders are unloading? Particularly those of companies whose stock price defies traditional financial analysis, the momentum stocks.
Momentum stocks always have the same premise. Ordinary accounting and financial valuation rules don’t apply to them. They are in short, bubbles. But until they burst, they are everyone’s best idea. As much as things change on Wall Street, things really don’t seem to change at all. The bubble term in vogue today is “disrupters.”. You can go broke betting against them. The old adage that Wall Street can remain irrational longer than you can be solvent is never more true than when it comes to concept stocks. So why even bother?
There is a way to bet against “the disrupters” without totally disrupting your investment returns. Many of these stocks are exceedingly difficult and expensive to short ( they are hard to borrow). It’s not a shock that many people agree the valuations are absurd and they have attracted large short interest. In fact squeezing the shorts in these names has been a very good trade for speculators willing to accomplish the literary equivalent of suspension of all disbelief. The way the Sax Angle is betting against these stocks is through the purchase of deep in the money puts with as much time to expiration on them as possible. Long dated options otherwise known as leap puts are expensive (premiums too high), unless they are deep in the money. Deep in the money options are not the most popular of options and are priced accordingly. Most people buy options for the leverage and/ or buy on margin but not deep in the money options. In fact volume is very thin and the bid/ask spread is often large. You have to put in limit orders and sometimes be patient. The benefit of the put speculation is that you limit your losses going into the investment. Unlike short selling where the loss can be infinite, you can never lose more than the money spent on the long put.
The other benefit of this contrarian bet is that if the market collapses under some unforeseen black swan event, you have some hedge on the downside. No doubt these high flyers will come crashing down with the rest of the stocks but at least you will have something working in an otherwise long portfolio of names. The added benefit is that these high flyers are also high beta and implied volatility. In other words they move in much bigger increments than the average stock so if there is a market crash of some kind, you should in theory get a portfolio move that will be much greater than the proportionate dollar amount invested.
Our favorite candidates by coincidence or no coincidence also have some of the largest insider selling. At least you can’t say the management is drunk on their Kool-Aid. We are going to continually update this list with names, dates and times. Check back here in a month, year or two and see how well we fared.
DDD 3D Systems Insiders have slowed the pace of selling on this high flyer since it more than doubled in May when the CEO sold over 20% of his stock. That will teach him something about the greater fool theory. Maybe he can just print some more stock since 3D Systems seems to be able to do everything.
The stock at 72.5 times 2014’s earnings is priced as if you are going to quit washing your socks and just print new ones tomorrow morning. Don’t get me wrong. I like the future too but even if the technology grows at 20% compounded rate the next 10 years, the company is only worth $25-30 per share not the $92.80 as it trades today.