This past weekend, my family and I were looking at new cars as the lease on one of our vehicles was nearing its end. I really find the whole car shopping experience painful — from the rounds of conversations, negotiating with different salespeople and managers, and all the paperwork until the bitter end. I also tend to feel I am not always getting a complete answer, though that may simply be my skeptical nature.
That same skeptical nature has helped me refine the strategies and techniques I use in looking at various industries, companies, their management teams and equity shares. While there are many credible management teams that are not only stewards of their companies and consistent communicators with investors in good times as well as bad, there are also ones that are not.
Now I’m not saying this or that management team is purposely misleading anyone. Rather, as an investor it is our job to combine all of the obvious information (company press releases and articles, filings with the Securities and Exchange Commission, and earnings-call transcripts and interviews) with other information. That other information can be found in a number of areas and may include insider transactions, short interest, changes in shareholder positions and more.
To be sure we are all on the same page, let’s make sure we have a working knowledge of those terms. “Insider transactions” are the buying and selling in a company’s securities by someone who has access to material, nonpublic information about the security, such as key players on the management team and company board members. “Short interest” measures the total number of shares of a security that have been sold short by investors and securities firms. Most stock exchanges track the short interest in each stock and issue reports at month’s end.
I find these reports helpful because they let me know what short sellers are doing and assist me in gauging overall market sentiment surrounding a particular stock. When looking at shareholder positions or investment positions in a particular stock held by mutual funds, pension funds, hedge funds and other institutional money managers, I look at the direction over time to determine if institutional money is getting into or out of the stock I am examining.
How do I use this type of information? More often than not, I’ll examine these as part of my normal diligence on a company and, depending on what I find, it can cause me to abandon a company. After all, if a company’s management team is reducing it ownership position (insider selling), I have to ask myself, “Why would I be a buyer when management is a seller?” I also have to wonder what they know about the business that my own diligence may not have turned up.
To be fair, I also have to see if expiring options are the culprits behind insider selling. If I were contemplating a long position, checking these and other findings could result in red flags, which may save me some time, money and aggravation later.
Of course, the flip side of insider selling or insider buying can be a favorable and confirming sign when looking to enter a position in a particular company’s stock. I said “can be” because if other key parts of my investment theme or thesis for the company is not shaping up, it’s a challenge for me to get behind a company just because the management team is upbeat.
But lets look at a real-world example.
As I mentioned in recent columns, despite an improving outlook for private-sector jobs, odds are that the continued high unemployment level along with rising input costs from oil to cotton and other commodities will drive prices higher and reduce discretionary spending. Those same inflationary pressures will result in either price increases for affected products or margin pressure, which may result in a Wall Street reduction in earnings expectations for a company. If that happens, odds are the companys shares will come under pressure.
With that in mind, lets look at the shares of True Religion, a manufacturer of premium denim wear (its jeans’ retail prices run $200 and up) and thus affected by cotton and synthetics costs. With gas and food prices rising, I suspect consumers looking to buy True Religion jeans will either buy fewer pairs than they might have a few months ago or will trade down to more affordable competing products offered by Seven For All Mankind, Joes Jeans or others.
Looking over some of the metrics mentioned above, we find that insiders have been selling shares in the company and in the past six months have reduced their exposure to True Religion shares by more than 9 percent. At the same time, institutional shareholders have shed more than 65 percent of their positions in True Religion shares, and as of Feb. 15, 5.9 million shares, or more than 25 percent of the float, was short.
From a cash-strapped consumer perspective and flags raised by insider selling and other metrics I touched on, I find it difficult to get behind such a company in an inflationary environment, particularly when it missed Wall Street earnings expectations two of the past three quarters.View Entire Story
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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