Spring Stock Sales: Signs of Something?

A recent spate of stock sales by key executives has drawn some unwanted attention to a couple of firms in the broadband networking space.

In news bulletins this morning, Thomson Financial Network published a list of insider trading information for Avanex Corp. (Nasdaq: AVNX), Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7), Brocade Communications Systems Inc. (Nasdaq: BRCD), Cisco Systems Inc. (Nasdaq: CSCO), New Focus Inc. (Nasdaq: NUFO), ONI Systems Inc. (Nasdaq: ONIS), and Sycamore Networks Inc. (Nasdaq: SCMR).

And in several instances, the results were jolting:

  • A senior VP at Cisco, Michelangelo Volpi, who also serves as the company's chief strategy officer, filed a form May 11 with the U.S. Securities and Exchange Commission to sell 797,312 shares of stock valued at $14.9 million.

  • Three top Brocade executives are looking to sell a combined 770,000 shares for nearly $38 million: The proposed transactions include a request dated May 22 to sell 300,000 shares valued at about $13.9 million by the family trust of CEO Greg Reyes; a request on May 29 for a proposed sale of 220,000 shares valued at $10.9 million by VP of engineering and cofounder Paul Bonderson and his wife Sandra; and a May 22 request for the proposed sale of 250,000 shares at $13 million by president/COO Michael Byrd and his wife Elizabeth.

  • In several requests late in May, New Focus investors U.S. Venture Partners proposed selling 687,832 shares valued at $8.8 million. Also, chairman of the board Milton Chang filed to sell 400,000 shares valued at $5.8 million, on May 21.

Is there cause for concern? Maybe -- and maybe not.

Ordinarily, there's nothing out of line about executive stock sales. By law, companies are required to restrict insider trading to specific windows of opportunity. Often, this accounts for a slew of executive transactions at once.

It's also not uncommon for executives to try and keep the sales down when business is off. "Folk know that it's very sensitive to sell lots of shares when business is not doing well. They try to avoid that," says David Jackson, optical components and systems analyst at Morgan Stanley. What seems notable about the above transactions, therefore, is their size, given the present market downturn. Also, it seems significant that more than one key investor is issuing a request for a large transaction. That tends to argue against the chance that one investor's personal financial requirements could be the cause for the cashout -- right?

Wrong, says Brocade. "There's nothing out of the ordinary here. Executives sell stock based on windows of time permitted by law," says a company spokesperson. "We don't have anything to say about it. It's a nonissue."

Cisco and New Focus did not return requests for comment at press time.

Unfortunately, analysts say that whatever the reason for a big stock sale -- and it may not be related to the company's financial condition -- it can lead to a syndrome of further selling.

"It impacts the company on three levels," says Mark Langley of Epoch Partners. First, he says, there's the perception that executives have a key reason for selling so much stock. Second, good-sized trades affect the stock price. And third, investors take the sale requests, rightly or wrongly, as a signal that something's up at the company.

"There's the sense that there must be some news, some event, that made them think this was a good time to sell their shares," he says.

New Focus, Langley says, has been suffering from the big-sale syndrome ever since the requests cited above were filed with the SEC two or three weeks ago. Now, instead of trading at 5.9 times the expected revenues, which is Epoch's barometer for competing optical subsystem companies, New Focus is trading at four times projected revenues, according to Langley.

But experts stress that suppositions about insider trades are just that. Indeed, in the absence of explanations, it is possible that big trades do not have to do with the company specifically at all, but are instead indicators of caution about the market itself.

"Tech stocks have undergone a correction of 50 to 80 percent in some cases. Investors are afraid to grab the falling knife," Langley says. The result is a kind of "run on the bank" mentality.

"There are a million reasons to sell, and only one to buy," he says.

- Mary Jander, Senior Editor, Light Reading
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photonic 12/4/2012 | 8:15:31 PM
re: Spring Stock Sales: Signs of Something?
A good journalist would have also reported the number of shares each of the people mentioned in the article holds. Just to say they are selling a bunch without mentioning what percentage of their holdings the sale represents is a real poor job.

I can see a follow up article when Cisco warns about next quarter claiming how well you pointed out the link between Volpi's sale and bad things going on at Cisco.

I hope you folks stick to the technology.
NoObjectivity 12/4/2012 | 8:15:29 PM
re: Spring Stock Sales: Signs of Something? Am I missing something here? Millions of shares are sold any given WEEK from execs in optical networking, datacom, what have you.

Why did LR decide to chose this specific example? Is it because a member of management at LR-hated Cisco sold?

Anyone (even gramma) in finance knows this is a daily, run-of-the-mill occurrence...

Mary - do you know your subject matter?
Scott Raynovich 12/4/2012 | 8:15:27 PM
re: Spring Stock Sales: Signs of Something? Sounds like you read a different article (or work at Cisco). It was pretty balanced, an the analysis pointed out there may be nothing to read in here. Analysis was on the spot. I quote from the article:

"Is there cause for concern? Maybe -- and maybe not."

"Ordinarily, there's nothing out of line about executive stock sales. By law, companies are required to restrict insider trading to specific windows of opportunity. Often, this accounts for a slew of executive transactions at once."
photonic 12/4/2012 | 8:15:26 PM
re: Spring Stock Sales: Signs of Something?
I never said it was biased. I believe the reader should know what percentage of the holdings the three people mentioned in the article sold. The fact that someone sold 700,000 shares does not mean much unless we know how many shares they could have actually sold. That was my only point.

opto 12/4/2012 | 8:15:22 PM
re: Spring Stock Sales: Signs of Something? Scott - Photonic is right. This is not a big slam, so don't take it that way, but it would be appropiate to cover the topic thoroughly, if at all.

Insider trading is covered by many financial publications in greater detail. Is this really an area where you feel your publication should be proficient? If so, perhaps you should quote coverage by some of the insider trading specialists, as missing the subleties does everyone a disservice.

Areas that should be covered:
> total shares/options vested
> lockout period date and number of shares/options that were no longer subject to lockout after that date
> history of selling of that person
> if other executives in the company, likely privvy to sales forecast information, are selling
> chance for the person selling to comment - it is fairly common for executives to explain to the press their family/personal situations that dictate a sell, especially when it is a larger number, and when it seems untimely

Right now, with the market down this much, suggesting that insider trading is an indication of further market softening does not seem to be a supportable argument, since other indicators are that we have reached bottom.

The other suggestion could be additional management problems inside a specific company. If that is the purpose of the article, then insider trading alone is not evidence enough to make the point.
try_again_please 12/4/2012 | 8:15:21 PM
re: Spring Stock Sales: Signs of Something? Sorry Scott,

Photonic was right on. Your quote from the article "Is there cause for concern? Maybe -- and maybe not." is about as vague as you can get. Kind of like saying, "will the sun rise tommorrow? Maybe -- and maybe not."

You provided little evidence as to the "maybe" or "maybe not". Too much "journalistic opinion" that avoided any sort of fact finding. The writer didn't supply (or more likely "have") enought information to the reader for this article to be take seriously.

There are countless reasons for the selling of the stock... maybe the sales were for diversification, or that he's going to put it into energy stocks because they are making money, or (as Photonic pointed out) how many shares they hold and what % they liquidated.

Right on Photonic.
LR, do more DD.
Scott Raynovich 12/4/2012 | 8:15:17 PM
re: Spring Stock Sales: Signs of Something? try_again_please (should I say try again please?):

Anytime Mike Volpi sells 800,000 shares of Cisco, it's news.

This information is important to people, regardless of how you analyze it yourself.

Some readers appreciate not having to comb through obscure (and sometimes not public) SEC filings to get the information themselves.

Others? Well, they complain about us offering free information and anlaysis. That's fine too.

photonic 12/4/2012 | 8:15:16 PM
re: Spring Stock Sales: Signs of Something?

If you guys are so damn good, why don't you simply go find out what percentage of Volpi's CSCO holdings he sold and update the article. End of story.

If he sold upwards of 40% of his holding, I will be the first to admit there is something fishy.

Stop patting your own backs and start finding the critical information missing from your article.

fatchance 12/4/2012 | 8:15:15 PM
re: Spring Stock Sales: Signs of Something? Get thee to Yahoo finance and you'al will have great detail on insider stock ownership, buys and sells. In fact you can see a list of all people who must follow SEC trade rules for that stock. The article could have used a URL for the insider data. A lot of techies read LR and they love data, it's a 'nice to have' kinda thing. A more interesting approach would be to read the tea leaves about buys & sells, and when that's an indicator of things to come. Often the upside potential is a better indicator.
Scott Raynovich 12/4/2012 | 8:15:14 PM
re: Spring Stock Sales: Signs of Something? Photonic,

Can't necessarily find out how many options Volpi holds. That's information that isn't made public. Only required to file when he EXERCISES the options and SELLS them, which he just did (and that's why we reported it). It would also be in a public filing if he owned over 2 percent of the company, which he doesn't.

For example, the last holdings statement he filed in Dec. of 2000 said he owned 27,000 shares. But he obviously holds far more options because he just exercised and sold 800,000.

To put it in perspective, the last time he sold a significant stake was 28-Nov-00 140,000, when he exercised Options at $5.6 and sold at $52.04 share for a take of $6,494,600.

Still think 800,000 is no big deal?

how's that for customer service: all for FREE!

We may update the story later but right now Mary's working on more important things.

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