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Lifelock Inc (LOCK) Faces FTC Action For Violating 2010 Order: Hedge Funds Got It Wrong

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The Federal Trade Commission (FTC) announced an action against Lifelock Inc (NYSE:LOCK) claiming that the company has failed to adhere with a 2010 order. The FTC accuses Lifelock Inc (NYSE:LOCK) of violating the 2010 order between the October 2012 to March 2014 period. The accusations are that Lifelock Inc (NYSE:LOCK) has failed to establish a fool-proof comprehensive information security program to protect its users’ sensitive personal information, falsely advertised that it protects users sensitive personal information on par with financial institutions, failed to meet 2010 order record keeping requirements, and falsely claimed that it protected users’ identity by sending alerts to users on identification of any problems. On the other hand Lifelock Inc (NYSE:LOCK) issued a response from its side stating that it would take the FTC to court. The shares of Lifelock dropped by 49.25% on Tuesday as the news about the FTC action broke. The stock bounced back on Wednesday by around 9%, closing at $8.90 per share.

Lifelock Inc (NYSE:LOCK)

There were a lot of analyst downgrades and price target cuts for Lifelock Inc (NYSE:LOCK)’s stock on Tuesday and Wednesday. Wunderlich has downgraded the stock to ‘Hold’ from a ‘Buy’ rating and reduced the price target to $9.25 from its previous target of $20. RBC has downgraded the stock to ‘Sector Perform’ with a price target cut to $11 from $20. KeyBanc Capital Market has downgraded the stock to ‘Sector Weight’ from ‘OverWeight’. Merrill Lynch has maintained its ‘Buy’ rating on the stock, but cut its price target to $12 per share.

By the end of March, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, with a total investment of around $158.1 million. 27 hedge funds had $127.9 million invested in the stock at the end of 2014. Lifelock Inc (NYSE:LOCK)’s stock lost around 23% of its value during the January – March period, but a 24% increase in hedge fund investments clearly shows that the hedge funds opted to pour more money into the stock during the first three months of the year, much to their current chagrin.

Most investors don’t understand hedge funds and indicators that are based on hedge fund and insider activity. They ignore hedge funds because of their recent poor performance in the long-running bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns enjoyed (or not) by investors. We uncovered through extensive research that hedge funds’ long positions in small-cap stocks actually greatly outperformed the market from 1999 to 2012, and built a system around this. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012 when this system went live, returning a cumulative 139.7% vs. less than 59% for the S&P 500 Index (read the details).

Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that lead to greater returns. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information. For Lifelock Inc (NYSE:LOCK) there have been no insider purchases of the stock so far this year, but there have been quite a few insider sales. Many top executives in the company sold their shares during the January – June period. Chairman and CEO at Lifelock Inc (NYSE:LOCK), Todd Davis sold 108,333 shares of the company since May 20. President Hilary Schneider sold around 10,000 shares since the beginning of June, and Chief Financial Officer Chris Power sold around 12,000 shares in the last two months.

Keeping this in mind, let’s take a look at the fresh hedge fund activity surrounding Lifelock Inc (NYSE:LOCK).

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