Taking Some Profits (and Losses)

On the amtrak typing on my ipad. Blogger never works quite as well on the ipad, so excuse me in advance for auto correct etc.

Happy Cinqo De Mayo everyone. I am enjoying a Modelo Especial to celebrate the day. I have to say that Modelo has become one of my two or three go to beers.  I have my headphones on, listening to a little iTunes Radio.

I did some selling today. I sold some GTAT (30% of my shares), LMNS (28% of shares) and FGL (20% of shares). As I have often extolled GTAT, I wanted to explain the sale (note - I was warned in a comment not to fall in love with a stock).

I still have an outsized GTAT position. Wth my multiplier, I bought 14,000 shares last year at 3.39. Since then, I have net added another 6,000 shares. I sold 6,000 today from the initial purchase (so a lt capital gain) at 16.72. So I am rally just back to initial position.

What bothers me about GTAT is the total lack of willingness of Gutierrez, the CEO to hold the stock. There could be many reasons for this, but I have to say, the last sale pretty much took the cake. My reading was that he exercised 50,000 options for cash on May 1st.  Now I have options from my job, and my options are a bit like Gutierrez options, in that you can hold them for up to ten years before you have to exercise them.  His options that he exercised did not expire until 2019. In my mind, there is absolutely no good reason to exercise options five years early.  This is because (a) they are leveraged - meaning as a percentage they grow in value faster than the stock and (b) you are accelerating a tax liability - why pay taxes on the gain now, if you can just wait until 2019.

Now it is very possible Mr Gutierrez has a legitimate reason to exercise the options. He could have kids going to college, he is buying a house, he is getting divorced... Who knows? Though even if you did need the money, it seems to me you would sell stock before exercising the options.  Of course another reason to exercise the options is if you do not think the stock will go any higher.  And that is the one that has me worried.

The second point that struck me as odd, was it appeared to me that he was exercising these options through a 10b-5 plan. Now this is a very normal way for an executive to sell options or stock. Essentially, the idea of a 10b-5 plan is for one to file in advance sales or purchases of stock - so it cannot be claimed you are trading on insider information (as these plans were set up well in advance).   But my limited knowledge of these plans is that they are supposed to be set up way in advance (so if you set one up in February, it might be allowed to start until August). That way you can really say they were done without insider knowledge.   But (unless I misread it) his 10b 5 plan was set up in March and began execution in May.  That is not illegal, but if there really is something wrong, a d&o lawsuit will be filed faster than you can say jack Robinson.

Now in defense of Mr Gutierrez, he has been selling shares pretty regularly the past couple of years. And if there was some plan to run up the price and then dump your shares, he did a poor job of the run up the price part in his earlier sales.  And secondly, while the dollars amounts seem large to normal folks, I suspect in the world of CEOs of billion dollar companies, his sales are not really for that much money.

The sec form 4 shows he has 168,000 shares of GTAT and then another 278,000 options. At $15 a share, that means his shares are worth about 2.5m and his options another say $3 million (all before taxes).  Again, a lot of money to working class folks, but for a CEO - I would wager most CEOs own more. So what am I saying? I am saying that when he sells 20% of his stock, it really is not that much money after taxes for someone trying to live the lifestyle of a CEO.

Anyway, now I have explained my sale, pretty much matching him.  His sales are most likely totally harmless - he would almost be a fool to be selling the shares the way he has if there really is some negative news that he knows about, the fur would fly.  But I kind of view him as a fool for selling the options as opposed to stock, though now that I think about it there could be reasons. If he needed to money (reasons listed above), his hands could potentially be tied on how many shares of GTAT he could sell (some boards require a CEO to own shares at a fixed multiple of their salary). The other possible answer is that he did not expect the stock to go up so fast when he set up his 10b-5 plan (instead of a date trigger, it could have had a dollar trigger).

Thoughts?

My sale on LMNS is because I really cannot give you a good reason why I am holding the shares. Except for some perverse hope that I can get back to even. And investing just based on hope, probably isn't wise. My FGL sale is based on my dissatisfaction with their (in my opinion) inflating their book value per share and 4th quarter earnings by using weighted average share counts instead of year end. Technically, I am sure what they did was allowable, but I think they should have showed it clearly both ways. Their IR department has not responded to me, but it is possible they are in a quiet period just prior to their May 8th earnings.

Ok. Back to my movie (Grand Torino).