Insider Weekends: A Large Sale By The CEO Of An Airline

Welcome to edition 520 of Insider Weekends. The Nasdaq hit an all time high intraday on Friday and the recovery from the March lows almost appears to be complete. The S&P 500 is lagging behind a bit and the Russell 2000 index of small cap stocks is still off more than 13% from its February high. The stock market rally has come as a big surprise to most seasoned investors, myself included. One theory proposed for the strength in the U.S. markets was that it was the best house on a burning street and there is a global flight to quality. However this stimulus driven rally is not just a U.S. phenomenon as you can see from the following chart comparing the last three months of performance of the S&P 500 with a developed markets ETF (EFA) and an emerging markets ETF (EEM).

SPY, EFA and EEM Three Months Performance

SPY, EFA and EEM Three Months Performance (source: Yahoo Finance)

If it is not a global preference for U.S. stocks then is it as simple as the age-old adage of “don’t fight the fed”? Or potential treatments in the form of a combination of Hydroxychloroquine with zinc or Gilead’s Remdesivir? Could it be the potential of having a vaccine available by the end of this year or the decline in cases in China, South Korea and then Europe? Maybe it is just Robinhood traders having fun bottom picking and being right.

I don’t post these questions from a place of bitterness at having missed this rally. To the contrary, I have been buying during the downturn by starting five new positions and adding to three existing positions. The latest of these new positions was a merger arbitrage opportunity I picked up last week. I am genuinely surprised by the strength of this rebound, especially in sectors like airlines, which are probably going to take a long time to recover as discussed in the insider sales section of this article.

I wrote about a COVID-19 playbook for premium subscribers in early April discussing four scenarios and my perceived probabilities of those scenarios playing out. I wrote the following in that post,

The Superforecasters featured in Philip E. Tetlock and Dan Gardner’s excellent book Superforecasting: The Art and Science of Prediction were only right about 66% of the time. It is possible that this situation plays out very differently from the scenarios I have outlined above or that my probabilities are wildly off. As I look at the current turn of events and my portfolio, I realize that the actions taken in the next few weeks are likely to have a significant impact on returns several years down the line. 

The insiders were right about buying their stocks in size both after the Great Recession and after this COVID-19 downturn. In the second week of March, insider buying surpassed insider selling for the first time in 10 years. The following week, which marked the bottom of this downturn, insiders once again bought more shares than they sold. In our March 22nd article Insider Buying Once Again Surpasses Insider Selling I wrote,

Depending on our response to this crisis, this could be a one quarter event with a quick peak and a decline or a long two quarter event with the pain spread over several months. If the situation is the former, then certain stocks look very attractive after large declines that have seen anywhere from half to more than two-thirds of their market value wiped out in the span of a month. Selling usually begets more selling as leveraged positions are unwound, funds respond to redemption requests and retail investors respond to the bad news they see everyday.

I have been unwinding the hedges I put in place more than a month ago, shorted the volatility index last week and plan to start nibbling on the long side from the COVID-19 watch list I wrote about earlier this month.

I still feel the risk remains to the downside and that we are likely to see a lot of volatility in the coming quarters but I realize the current market action is pointing in a different direction. NYU Professor and Wall Street’s “Dean of Valuation”, Aswath Damodaran said it best on Twitter,

Aswath Damodaran: Humility Is The Best Option

Aswath Damodaran: Humility Is The Best Option

Insider buying decreased last week with insiders purchasing $132.98 million of stock compared to $209.6 million in the week prior. Selling increased with insiders selling $1.55 billion of stock last week compared to $1.47 billion in the week prior.

Sell/Buy Ratio: The insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by total insider purchases that week. The adjusted ratio for last week went up to 11.62. In other words, insiders sold almost 12 times as much stock as they purchased. The Sell/Buy ratio this week compares unfavorably with the prior week, when the ratio stood at 7.02. 

Insider Sector Heat Map June 5, 2020

Insider Sector Heat Map June 5, 2020 (click to enlarge)

Note: As mentioned in the first post in this series, certain industries have their preferred metrics such as same store sales for retailers, funds from operations (FFO) for REITs and revenue per available room (RevPAR) for hotels that provide a better basis for comparison than simple valuation metrics. However metrics like Price/Earnings, Price/Sales and Enterprise Value/EBITDA included below should provide a good starting point for analyzing the majority of stocks.

Notable Insider Buys:

1. Danaher Corporation (DHR): $173.23

Chairman of Executive Committee Mitchell P. Rales acquired 141,420 shares of this industrial, medical and commercial products company, paying $164.69 per share for a total amount of $23.29 million. Mr. Rales increased his stake by 6.32% to 2,377,874 shares with this purchase.

Mr. Rales is the only insider of Danaher that has been buying stock of the company over the last three years. His prior purchases were small and pale in comparison to this sizable purchase.

You can view the list of recent insider transactions for Danaher Corporation here.

P/E: 39.26 Forward P/E: 29.61 Industry P/E: 46.58
P/S: 6.79 Price/Book: 4.1 EV/EBITDA: 32.5
Market Cap: $122.48B Avg. Daily Volume: 4,027,629 52 Week Range: $119.6 – $174.1

2. Avid Technology, Inc. (AVID): $7.89

Director Christian Asmar acquired 1,076,453 shares of this technology hardware, software and peripherals company, paying $6.79 per share for a total amount of $7.31 million. These shares were purchased indirectly by Impactive Capital GP LLC.

This is the second week in a row Avid Technology has made our list. We wrote the following about Mr. Asmar’s purchase last week,

Mr. Asmar is the cofounder of New York based activist hedge fund Impactive Capital, which has nearly $400 million in assets under management. Prior to starting Impactive Capital, he was at Blue Harbour Group, a $3 billion activist investment firm where he was a Managing Director and Investing Partner. He has served on Avid’s Board of Directors since October 2019. With this round of purchases, Avid Technologies is most likely the top holding for Impactive Capital with nearly 15% of capital allocated to this position.

This is the first insider purchase we have seen at the company since a director purchased 80,000 shares in December 2017. For several years a large number of insiders have also been exercising options without selling them.

You can view the list of recent insider transactions for Avid Technology, Inc. here.

P/E: N/A Forward P/E: 10.25 Industry P/E: 23.14
P/S: 0.84 Price/Book: N/A EV/EBITDA: 13.64
Market Cap: $344.78M Avg. Daily Volume: 715,996 52 Week Range: $4.67 – $10.79

3. Allogene Therapeutics, Inc. (ALLO): $42.63

Director Arie Belldegrun acquired 146,382 shares of this biotech company, paying $47.00 per share for a total amount of $6.88 million. These shares were purchased indirectly by various entities.

You can view the list of recent insider transactions for Allogene Therapeutics, Inc. here.

P/E: N/A Forward P/E: -16.4 Industry P/E: 1,858.35
P/S: N/A Price/Book: 8.39 EV/EBITDA: -28.63
Market Cap: $5.34B Avg. Daily Volume: 1,216,326 52 Week Range: $17.43 – $55

4. La Jolla Pharmaceutical Company (LJPC): $5.41

Director Kevin C. Tang acquired 615,129 shares of this biotech company, paying $4.91 per share for a total amount of $3.02 million. These shares were purchased indirectly by Tang Capital Partners, LP.

You can view the list of recent insider transactions for La Jolla Pharmaceutical Company here.

P/E: N/A Forward P/E: -5.15 Industry P/E: 1,858.35
P/S: 7.39 Price/Book: N/A EV/EBITDA: -1.67
Market Cap: $147.69M Avg. Daily Volume: 845,756 52 Week Range: $2.3 – $12.48

5. HC2 Holdings, Inc. (HCHC): $3.23

Shares of this construction and engineering company were acquired by 2 insiders:

  • Director Avram A. Glazer acquired 612,634 shares, paying $2.83 per share for a total amount of $1.74 million. Mr. Glazer increased his stake by 23.76% to 3,190,634 shares with this purchase.
  • Director Kenneth S. Courtis acquired 46,014 shares, paying $2.99 per share for a total amount of $137,379. Mr. Courtis increased his stake by 19.39% to 283,350 shares with this purchase.

You can view the list of recent insider transactions for HC2 Holdings, Inc. here.

P/E: N/A Forward P/E: -2.58 Industry P/E: N/A
P/S: 0.07 Price/Book: 0.37 EV/EBITDA: 8.36
Market Cap: $150.36M Avg. Daily Volume: 365,053 52 Week Range: $1.29 – $4.33

You can view the full list of purchases from this Insider Buying page.

Notable Insider Sales:

1. Copart, Inc. (CPRT): $91.82

Shares of this online auctions and vehicle remarketing services provider were sold by 2 insiders:

  • Chairman of the Board Willis J. Johnson sold 1,100,000 shares for $89.19, generating $98.11 million from the sale.
  • Director Matt Blunt sold 40,000 shares for $89.25, generating $3.57 million from the sale. These shares were sold as a result of exercising options immediately prior to the sale.

You can view the list of recent insider transactions for Copart, Inc. here.

P/E: 31.63 Forward P/E: 35.45 Industry P/E: 53.73
P/S: 10.1 Price/Book: 11.08 EV/EBITDA: 25
Market Cap: $21.56B Avg. Daily Volume: 2,445,354 52 Week Range: $55.69 – $104.88

2. Workday, Inc. (WDAY): $178.67

Shares of this software application company were sold by 3 insiders:

  • Director David A. Duffield sold 278,379 shares for $179.65, generating $50.01 million from the sale.
  • Co-President Gomez Luciano Fernandez sold 10,769 shares for $181.60, generating $1.96 millionfrom the sale.
  • Co-President & CFO Robynne Sisco sold 95 shares for $178.71, generating $16,977 from the sale.

You can view the list of recent insider transactions for Workday, Inc. here.

P/E: N/A Forward P/E: 65.21 Industry P/E: 47.13
P/S: 10.99 Price/Book: 16.15 EV/EBITDA: -263.32
Market Cap: $41.99B Avg. Daily Volume: 2,898,459 52 Week Range: $107.75 – $226.83

3. Ares Management Corporation (ARES): $39.66

Shares of this alternative asset manager were sold by 3 insiders:

  • C-Founder & Exec. Chairman Antony P. Ressler sold 328,372 shares for $38.69, generating $12.7 million from the sale. These shares were sold indirectly by TJ Capital Investors, LLC.
  • Co-Founder & Co-Chair of PEG David B. Kaplan sold 268,160 shares for $38.11, generating $10.22 million from the sale. These shares were sold indirectly by Trently Holdings, LLC.
  • Co-Founder, CEO and President Michael J. Arougheti sold 33,138 shares for $37.45, generating $1.24 million from the sale.

You can view the list of recent insider transactions for Ares Management Corporation here.

P/E: 44.97 Forward P/E: 18.36 Industry P/E: 20.50
P/S: 3.33 Price/Book: 10.04 EV/EBITDA: 40.65
Market Cap: $5.25B Avg. Daily Volume: 1,147,179 52 Week Range: $20.2 – $41.88

4. Allegiant Travel Company (ALGT): $124.1

CEO and Chairman Maurice J. Gallagher Jr. sold 165,000 shares of this airline for $124.57, generating $20.55 million from the sale.

The sectors that were hurt the most during the COVID-19 downturn like retail and travel have rebounded the most from the lows. Some retailers have more tripled from their lows and even the most leveraged airlines like American Airlines Group (AAL) have more than doubled from their lows. In this context, it is not surprising to see the CEO of the discount travel company Allegiant take the opportunity to sell stock.

His previous sale was in October 2019 when he sold 75,000 shares at an average price of $164.40, generating $12.33 million from the sale. Despite the decline in the stock price since then, he significantly increased his selling. As you can see from the chart below, commercial flight volume has rebounded a little off its lows but it still remains well below its January high. Commercial flights tracked by flightradar24 include cargo planes, commercial passenger flights, charter planes and some business jets.

Before “adjustments” Allegiant lost $2.08 per share in Q1 2020 and is expected to lose even more when it reports Q2 and Q3 earnings.

Commercial Flight Volume

Commercial Flight Volume – Click to Enlarge (source: flightradar24)

You can view the list of recent insider transactions for Allegiant Travel Company here.

P/E: 9.48 Forward P/E: 16.1 Industry P/E: 23.47
P/S: 1.12 Price/Book: 2.4 EV/EBITDA: 6.81
Market Cap: $2.01B Avg. Daily Volume: 365,087 52 Week Range: $60.06 – $183.26

5. NVIDIA Corporation (NVDA): $356.8

Director Tench Coxe sold 50,000 shares of this semiconductor company for $349.08, generating $17.45 million from the sale. These shares were sold indirectly by a trust.

You can view the list of recent insider transactions for NVIDIA Corporation here.

P/E: 91.37 Forward P/E: 36.3 Industry P/E: 26.38
P/S: 21.9 Price/Book: 19.47 EV/EBITDA: 82.85
Market Cap: $219.43B Avg. Daily Volume: 15,225,364 52 Week Range: $142.84 – $367.27

You can view the full list of sales from this Insider Sales page.

The list of all insider purchases and sales by management people is only available to InsideArbitrage Premium members.

Disclaimer: I hold long positions in Twitter, Gilead Sciences and Workday. Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.

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