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Insider selling
THE MOTLEY FOOL
Ask the Fool
Published: January 25, 2022
Q: An insider at a company I'm invested in sold tens of thousands of shares. Who buys those? -- C.R., Ann Arbor, Michigan
A: When company insiders -- such as owners, top executives or directors -- sell some of their shares, they often do so in the open market, where any investor can buy them. If there are many more shares for sale than there are interested buyers, the price will drop until it reaches a point at which buyers will buy.
It's reasonable to pay attention to insider buying and selling for companies of interest, but don't overdo it: Remember that at many businesses, bigwigs get a large portion of their compensation in the form of stock, so when they need or want cash, it's common for them to sell some -- or many -- shares. Some degree of insider selling is routine and a nonevent, but insider buying is generally a good sign, as it suggests that people with the deepest knowledge of the company expect their shares to rise in value.
It's worth finding out what portion of their total shares a given insider has sold -- you can look up such information at sites such as FinViz.com/insidertrading.ashx.
Q: What are derivatives? -- B.V., Richmond, California
A: They're complex financial contracts whose value is derived from other assets or benchmarks, such as stocks, bonds, interest rates, market indexes, mortgages or currencies. They're generally bought or sold by financial professionals to hedge risks or to gain access to particular markets. Common derivatives include futures and options.
Derivatives can be very risky and unsuitable for less experienced investors, in part because many are not regulated. Warren Buffett has called them "financial weapons of mass destruction."
Fool's School
Kinds of Stocks
Stocks can be categorized in many ways, and different kinds of investors may prefer to focus on certain kinds of stocks. Here are some common types:
-- Value stocks are those trading for less than their intrinsic value. They appeal to more conservative investors who demand a margin of safety. They often trade at relatively low prices because they're out of favor with other investors.
-- Growth stocks are those of companies that are growing faster than average (based on metrics such as revenue and earnings). They're sought by more aggressive investors willing to take on more risk, buying stocks that may be overvalued.
-- Blue chip stocks are those of well-respected, steadily growing large companies, such as Bank of America, Coca-Cola, IBM, Johnson & Johnson, Nike, Procter & Gamble and Walt Disney. They're generally regarded as safer than average.
-- Speculative stocks tend to be risky, but they offer a small chance of high returns. They include penny stocks, stocks in emerging industries or economies, and rare-materials stocks. Some biotechnology stocks can be speculative if their success depends on drugs in development that are not yet approved.
-- Income stocks pay dividends to shareholders, typically via quarterly cash payments. Favored by retirees and others seeking income from investments, they can be slower growers.
-- Cyclical stocks fluctuate with the economy. Carmakers and cruise companies, for example, may see business boom when the economy is growing and contract during downturns, when people tighten their purse strings.
-- Defensive stocks usually remain stable during economic volatility. Think basic needs: groceries, soap, medicines, electricity and so on. Consumers will purchase these items and services in good times and in bad.
Some stocks can fit several of these descriptions -- perhaps being a dividend-paying defensive stock, or a fast-growing value stock. It's worth spending a little time figuring out what kind of investor you are, and what kinds of stocks suit you best.
My Dumbest Investment
Sight Unseen
My partner and I got into residential rental real estate about a decade ago. We bought several properties at an annual tax auction, most of which we subjected to appropriate due diligence. One ended up turning a good profit when we sold it five years later; we roughly broke even, or expect to at least break even, on the rest. In aggregate, our annual return on these properties worked out to about 4%.
However, we bought one property sight unseen, doing only some online research the night before the auction -- county records, Google Earth and Street View, etc. We were green and afraid of missing the opportunity. We won the bid at $21,000. When we drove by our new acquisition after leaving the auction, we discovered that a huge tree had fallen directly through the middle of the building, which was in imminent danger of collapse. It didn't need a new roof -- it needed to be torn down! We would have been better off if it had been a vacant lot. We sold it for a net loss of $16,000. We thank our lucky stars this lesson was so "cheap," relatively speaking. -- M.M., online
The Fool responds: If you're savvy or lucky, you can make good money in real estate, but as you learned, it can be tricky. (Over long periods, the stock market has had much higher average annual returns than residential properties.)
Foolish Trivia
Name That Company
I trace my roots back to 1847, when a 30-year-old German invented an improved electric telegraph and launched a telegraph construction company in Berlin. In the 1850s, I built much of the Russian state telegraph network. I introduced a profit-sharing plan for employees in 1858 and a pension in 1872. I laid multiple trans-Atlantic cables in the 1870s, and entered data processing in the 1950s. With a recent market value near $139 billion, I'm a technology giant serving customers in industry, infrastructure, transport and health care. I employ about 300,000 people worldwide and rake in around $70 billion annually. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1940, when two brothers opened a barbecue joint in California. In 1948, they switched to selling 15-cent burgers and made their restaurant more efficient via their "Speedee Service System." In 1954, a visiting salesman was impressed. By 1961, he had bought the rights to their name and system of operations. Today, based in Chicago, I'm a quick-serve powerhouse, with close to 40,000 locations around the world and a recent market value near $200 billion. At the end of 2020, I employed about 200,000 people, and another 2-million-plus worked for my franchises. Who am I? (Answer: McDonald's)
The Motley Fool Take
A Telecom Treat
In recent months, the telecom sector has come under severe pressure. Investors seem to think that the market is now saturated with smartphone and broadband subscriptions, leaving the remaining telecom giants to fight over a smaller pie. Recent aggressive promotions from U.S. cellphone carriers have only boosted this fear.
Yet if there is a price war over market share, T-Mobile US (Nasdaq: TMUS) seems well-positioned to be one of the winners. Thanks to its 2020 acquisition of Sprint and some savvy spectrum investments, T-Mobile has a two-year lead in 5G deployment. It just completed its nationwide rollout of mid-band spectrum, covering 200 million people, which will give T-Mobile customers speeds markedly higher than 4G. Competitors Verizon and AT&T won't be able to match it for at least two years, and even then, T-Mobile believes it will have reached 300 million people with mid-band 5G by that time.
Though the stock was recently down roughly 20% from its 52-week high, T-Mobile's management has remained confident about hitting its long-term targets, projecting a big increase in free cash flow in 2023 and beyond. The company also has a major network advantage in rural markets and a promising partnership with Walmart -- which can sign up new subscribers at 2,300 of its stores. All together, these factors make T-Mobile an attractive candidate for long-term portfolios. (The Motley Fool has recommended T-Mobile US.)
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