What if we knew what the directors of public companies i.e. ones on the stock exchange, really thought about the fortunes of their company? Sure they often release press statements saying how excited they are about the future and how great their company’s products are but how can we work out what is passion and what is spin?
One tool to do this is their insider trading. We often think of the term ‘insider trading’ as a bad one or something illegal. In fact all it means is that someone with better knowledge than the market is buying or selling shares. In the case of the executives and directors of companies it is inevitable that they have knowledge of their companies which would be detrimental for them to reveal publicly. Yet, it is desirable for them to engage in the buying and selling of shares in their company. After all, they are often own significant fractions of the companies they work for and it would be difficult to restrict them in buying or selling this ownership (which is what shares of a company are: packets of ownership).
To get around this problem of people with better knowledge of the market needing to be able to buy and sell shares, the rule is simply this: if they trade in share of a company where they are a director or executive, they must publicly declare the trade to the market. Unfortunately they are under no obligation to state why they engaged in that transaction.
My thoughts on this are strongly influenced by two writers: Warren Buffett (through his Berkshire Hathaway annual letters) and Benjamin Graham (through his book ‘The Intelligent Investor’). Given Graham was the lecturer of Buffett, the two are closely aligned on this subject. Essentially, the reasons people buy or sell shares are pretty simple.
People buy shares because:
People sell shares because:
In short, if ‘insiders’ are buying this is an indication of a good investment. If ‘insiders’ are selling it MAY indicate a bad investment.
Using this as our measuring stick, we can see if the statements made by the leaders of Microsoft and salesforce.com are in alignment with their share trades.
For this analysis I have used the insider trades for 2011. The reason for this specific year is that it was easy to find the numbers and pump them into Excel by using Yahoo finance. Here is the link: http://finance.yahoo.com/q/it?s=MSFT+Insider+Transactions. For salesforce.com you get the same URL and replace ‘MSFT’ with ‘CRM’.
If you want more years, another great source is insidermonkey.com.
The only downside with using the Yahoo finance table is that they have put footnote references above the total dollar value where the trades were done across a number of share prices. The upshot of this is if the table shows ‘2,253,0002‘ this pastes into Excel as ‘2,253,002’. Given the large numbers at play I have not worried too much about it as this will not have a significant effect on the results.
GATES WILLIAM H III
SINOFSKY STEVEN J
BRUMMEL LISA E
MUNDIE CRAIG J
SMITH BRADFORD L
TURNER BRIAN KEVIN
DELBENE KURT D
BROD FRANK H
KLEIN PETER S
This shows the $ value of shares sold, each quarter, of directors and executive officers.
So who are these people?:
We have two members of the board (out of nine) and nine executives.
The top four sellers (Bill Gates, Steven Sinofsky, Lisa Brummel and Craig Mundie) sold a significant number of shares, in terms of dollar value in 2011 (accounting for 99% of the shares sold).
The reason Bill Gates sells his shares is well documented. The half a billion dollars per quarter goes to fund the Bill and Melinda Gates foundation.
Steven Sinofsky’s reasons are unknown but, given the rise of the iPad, perhaps he though it was time to cash in some of his stock and diversify into Apple.
Lisa Brummel did the majority of her selling in the third quarter of 2011 and runs Human Resources at Microsoft. It is not clear why she needed $29m in 2011 an it is unlikely it was to cover a few bills.
Craig Mundie also sold a similar amount to Lisa. His reasons are also unclear.
A special mention should also go to Steve Ballmer, who, at the end of 2010, sold about $2b in shares. While Steve insists he is fully behind Microsoft and its products, it is clear he feels his personal money (or at least $2b of it) is better invested elsewhere.
While this does not look good, there is one factor which could explain the sales and that is Bill Gates continuous sales of lots of shares. Here is the Microsoft stock price for the last ten years:
This is one of the least interesting share graphs I have ever seen. The Microsoft price never varies much from $28 per share (except around 2008 where there was a small blip). If you have someone in the market with a large supply compared to demand, it is going to drive the price down. The fact that Microsoft has maintained its price, despite Bill’s constant stock selling it a testament to the robust nature of the organisation. However, if I also have a large amount of stock, I can understand that I may feel that my money could be growing faster somewhere else.
Here it is.
VAN VEENENDAAL FRANK
KOPLOW HILARIE A.
SCLAVOS STRATTON D
In this case we have:
Here we have five members of the board (out of nine) and six officers. I have an issue with over half the board (i.e. those responsible for the strategic direction and financial health of an organisation) selling out of the company they are directing.
In the case of salesforce we need to go to the top seven (Craig Ramsey, Graham Smith, Parker Harris, Frank Van Veenendaal, George Hu, Hilarie A. Koplow, Lawrence Tomlinson) to cover 99% of sales.
Here is the much more interesting ten year graph for salesforce.
A few things to note. Firstly, we do not have the full ten years because salesforce.com has not been publicly traded for the ten years. Also, other than the same blip that temporarily sank Microsoft’s price near the end of 2008, the salesforce share price continued to rise until 2011 when it has flattened off a little.
I can find no public comments by the insiders as to why they sold their shares in 2011.
As to the behaviour exhibited by both sets of insiders, one thing you can see is that while Microsoft insiders sold sporadically (only four out of the eleven selling in three or more quarters), the salesforce insiders were more frequent in their selling (seven out of eleven sold in three or more quarters).
Graham Smith, the CFO of salesforce I find the most interesting.
You might remember back in September 2011 I summarised the transcript of the Q2 results for salesforce(http://leontribe.blogspot.com.au/2011/09/does-salesforce-have-their-head-in.html). The transcript was from August 18, 2011.
Graham Smith featured prominently in that call describing the salesforce results as an ‘exceptionally strong quarter’.
So, if the results of salesforce were so strong, why was Graham selling close to $10m in stock prior to the results (or thereabouts) and a little over $60m in shares afterwards? I do not know the answers and, maybe, Graham does need the pocket change but the timing is dreadful in terms of the mixed message it sends.
The name that is missing from this is our good friend Marc Benioff who is both a director, being the chairman of the board and an officer, being the CEO. In Australia, this situation of being a director and officer does occur but it is not as common as the USA. The reason being it is seen as a potential conflict of interest. A simple example is that of compensation. The board generally sets the compensation levels for executive officers. If the people deciding the compensation are the ones receiving it, there are clear terms of reference issues. I have no idea whether this specific example is an issue at salesforce, I simply cite it as an example.
So did Marc sell shares in 2011? No he did not. However, he had been busy selling shares up to the start of 2011, despite the stellar performance of the stock over the years. Back in 2006, Marc held 22.8 million shares (http://accounting.smartpros.com/x53957.xml). By the end of 2010 he had sold down to the last ten million and then stopped. Here is the video where he is asked why he sells so much stock and he deftly avoids answering the question completely (around the eight minute mark http://allthingsd.com/20110304/video-marc-benioff-answers-his-critics-with-a-little-help-from-jim-cramer/)
The fact is despite his exuberance for the salesforce model and despite the stellar performance of the stock, Marc was, until 2011, regularly selling his ownership of the company. Either he had doubts about his own hype, he had big debts or he knew of a better investment than one which had increased its share price five-fold in five years (around a 38% annual return).
Not one officer or director at either Microsoft or salesforce bought their own stock in 2011. With the steady price of Microsoft and the flattened performance of salesforce it is understandable but still a little surprising.
Perhaps my biases are shining through loud and clear but I understand why Microsoft insiders would not be overly impressed with their Microsoft stock. The price does not move and, with Bill generating a couple of billion a year through the divestment of Microsoft ownership, the hill the stock has to climb is just a little bit steeper.
As for salesforce, I am stumped. Taking the CFO and Marc as the champions of the company, both consider salesforce to be strategically and financially sound. The stock market agrees and yet they, and many of the board, are offloading ownership on a regular basis.
Perhaps, like me, the salesforce insiders feel the stock price is overvalued. Therefore, while they are confident of the future, they are not confident in the share price. If so, they would do well to communicate this to the market rather than let others hold on to their dreams while the insiders know a nightmare is coming, but get rich before it arrives.
Perhaps I ask too much of company executives in asking they reveal their motives as well as their actions.
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