Many years of experience working directly with insiders has taught that there can be countless reasons an insider will sell shares of his company’s stock. When we keep track of insiders selling shares of their own stock, taking the time to look for those reasons instead of jumping to conclusions can help avoid bad decisions based on assumptions.
Contrary to popular belief, officers and directors of public companies are human just like the rest of us. They have bills, kids getting ready to leave for college or just the need to diversify their portfolio. In many cases, not only are the sales understandable and nothing that should trigger anxiety in an average investor, but sometimes just a wise financial move.
The Chairman and Chief Executive Officer of Edwards Lifesciences Corp. (NYSE:EW), Michael A. Mussallem, is a great example of an insider that is understandably selling a large amount of stock. EW, the top supplier of heart valves in the world granted stock options to its executives like many public companies do. One large grant of options is due to expire in April and May of 2013. The company and Mr. Mussallem have formed a sales plan for those shares under S.E.C. Rule 10b5-1.
Often referred to the “safe harbor” rule, Rule 10b5-1 was created to provide executives a vehicle to plan the purchase or sale of shares of company stock when they are not in possession of material, non-public information. Because future sales were planned at this time, the executives will not have to worry about the future sales appearing to be timed due to information they have.
Back in May, Mr. Mussallem, began exercising the stock options that are near expiration. The sales plan provides for the exercise and sale of up to 35,000 shares per month. The sales are intended to be spread evenly over each month until the options expire.
A few other executives have sold shares of EW under similar plans this year. Most recently, Huimin Wang, Corporate Vice President, Japan, Asia Pacific and Latin America, sold 6,250 shares in an option exercise transaction on July 5 at an average sales price of $104.22 per share. Also selling shares in a stock option exercise transaction recently was Corporate Vice President Donald E. Bobo, Jr. Mr. Bobo sold 23,000 shares on June 14 at an average price of $96.80 per share.
Charles River Laboratories International, Inc. (NYSE:CRL), the $1.6 billion biotechnology firm is another healthcare company with insiders selling shares using the safe harbor of Rule 10b5-1. Under the company’s Corporate Governance Guidelines, insiders are not required, but are “encouraged” to sell through the use of Rule 10b5-1 sales that the company will set up for them. The largest sales have come from its Chairman and Chief Executive Officer, James Foster. Mr. Foster has sold small, similar sized blocks of stock each month this year. He has sold a total of 117,380 shares this year, through July 9, 2012, at an average price of $32.5412.
Other insiders have also sold shares under the same safe harbor plan, most recently by Executive Vice President David Johst, who sold 20,290 shares at $33.50 on July 5. Preceding him was Thomas Ackerman, the Chief Financial Officer who sold 11,500 shares at $34.00 two days earlier on July 3, 2012.
It is a fact that officers and directors have shares of stock or stock options granted to them as part of their entire compensation package. To them, the shares are part of their paycheck. But seeing insiders sell large amounts of shares on the open market can unnerve the steadiest of investors. Seeing them sell in groups can cause near panic as investors believe there has to be a reason for the sales and also decide to sell their shares as well. But much of the time, the officers and directors just wish to diversify their portfolio or need to raise funds for large expenses such as college tuition or a new home. In the case of Mr. Mussallem at EW, his stock options were set to expire soon and the plan allows him to sell a majority of those expiring options while preventing any appearance of trouble at the company. Rule 10b5-1 affords those insiders the opportunity to make sales in an orderly fashion. The sales are known in advance by the public helping to alleviate much of the anxiety of seeing your stock’s executives sell.