Insiders

All posts tagged Insiders

White Rabbit: Don’t just do something, stand there                                                – Walt Disney, “Alice in Wonderland” 1951

Kudos to Ben Hunt for this excellent piece on the role of narrative in markets, and for using better quotes than me. Anyone who can base insightful equity analysis around a quote from the Godfather deserves special mention.

Ben takes us all the way from his overarching explanation of what is behind market moves, right down to the nitty gritty, which in this instance means Salesforce.com. The image below shows the inexorable rise of analysts’ forecasts for the company’s earnings, even though Ben notes that he is “pretty sure that Salesforce.com has never had a single penny of GAAP earnings in its existence”. The chart also shows the large wobble that the shares had earlier in the year, although the doubters have since seen the error of their ways.

Salesforce.com Share Price and Estimates

In a simple but telling piece of analysis, Ben shows that in the last five years, owning Salesforce.com on only the 21 days after its earnings releases and the 43 days that the Fed made an announcement, returned 167%. Owning Salesforce.com on the other 1,208 trading days would have lost 8%. For a stock up 138% in that time, you could have been standing around doing nothing an awful lot and avoided losing money.

Ben also notes that CEO Marc Benioff, whose ebullient narrative drives the stock’s upward trajectory when the Fed Chairman is not doing this for him, uses 10b5-1 programs to sell shares in his company every day. These programs are predetermined sales and thus do not flag on the OTAS Insiders stamp, but you can see them by unticking the Priority Transactions box in your Core Summary app.

Daily Selling by Salesforce.com Insiders

In many ways Salesforce.com is typical of the handful of software companies that truly make it. Over time the company’s success returns cash flow and eventually earnings and the rating slowly normalises. While Salesforce.com is still 3.8x the average sector multiple, the steady de-rating appears to be well underway.

Salesforce.com Eroding Valuation

Reflecting on Ben’s analysis that you make money in short bursts and could spend most of your time doing nothing, I was struck by the similarity of this to the OTAS trading mantra, which may be expressed as SLOW DOWN AND DO NOTHING. Most of the time when trading you may leave your orders in an algo and do something else. Only in exceptional circumstances do you need to intervene to adjust an order and OTAS will fire an alert to tell you when that happens.

Jack Dorsey, Twitter’s co founder, chairman and interim CEO bought $875,000 of the company’s shares last Friday, in his first trade since the company listed. He is buying alongside a number of other company insiders this month, as shown on the chart of Twitter’s stock price below.

Twitter Insiders

What is interesting is that the total dollar amount committed to buying Twitter shares of late pales alongside the amount raised by the one seller, Evan Williams, a former President, CEO and CFO of the company, who has unloaded multiple millions of dollars worth of stock.

In OTAS we differentiate between routine sales by insiders who understandably want to dispose of stock accumulated prior to the listing, and trades afforded high importance that have a directional bias. Williams has made only one high priority disposal, which was back in May, but it is sufficient to mark him out as the most successful insider trader of Twitter shares.

Dorsey may grab the headlines, but to date Williams takes the plaudits as the better trader of Twitter shares. Time will tell whether Dorsey and his colleagues have made a profitable investment, but the size of their purchases might indicate a lack of complete conviction. EPS Momentum is firmly negative for the shares, although the stock price has fallen well below the trend of forward earnings estimates, as investors raise serious questions about whether the growth rate that Twitter can deliver justifies the valuation attached to the group.

At 30x EV/EBITDA Twitter is at the lowest value since its listing, both in absolute terms and relative to peers and the market, but still has the highest absolute valuation of all but Linkedin. With no yield and precious little free cash flow yield to support the shares and an EV/Sales ratio that would make all but Facebook blush, Dorsey and his fellow insiders have their work cut out to convince investors that the timing of their recent modest share purchases was well informed.

Check out OTAS for more detail on everything discussed in this blog, including a full listing of insider traders at Twitter and a ranking of directors by success or failure of their trades.