Insider sales of stock often are routine
Question: When company insiders sell millions of shares of company stock, who are the buyers? — E.B., Riverside, California
Answer: Shares sold by insiders such as officers, directors or owners of a company are sold in the open market, where anyone with a brokerage account can buy them. Of course, 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.
Several million shares certainly seems like a massive amount, but remember that many companies have billions of shares, and in the course of a typical trading day, many have a high volume of trading. In recent months, Microsoft’s average daily volume was about 23 million shares, while Bank of America’s was around 90 million.
It can be smart to examine insider purchases and sales for companies that interest you. Some occasional selling is routine, as many insiders get much of their compensation in the form of stock and must sell shares occasionally to generate cash. When insiders buy shares, it’s generally a bullish sign — but one or more insiders unloading a large portion of their shares can be worrisome. You can look up insider transactions at websites such as finviz. com/insidertrading.ashx.
Fool’s School:
When debt is good
It’s easy to assume that savvy investors should avoid companies with debt. Too much debt can be a red flag, but debt isn’t necessarily all bad.
If a company is carrying a lot of debt, it’s locked into interest payments that it must make. If, at any point, it doesn’t have the cash to meet its obligations, it’s in trouble. (Many of us can relate to this if we’ve racked up debt on credit cards.) Even if the company can make the payments, it’s spending money on debt that it might have been able to use in other, more productive, ways.
But debt can help businesses survive and grow, too. It’s certainly necessary for many of us individuals, as without mortgages, we would never be able to buy our homes. Car loans and student loans are sometimes prudent choices, too — especially when interest rates are low.
Many major companies, such as Subway, Amazon. com, Whole Foods Market, United Parcel Service and Starbucks, exist because of early loans to their founders. Established companies can make good use of debt, too, borrowing to expand operations and grow their businesses. And interest payments, which are deductible, can decrease a company’s taxable income.
Investors considering companies with debt need to evaluate whether the debt taken on is manageable and whether the money raised and invested is earning more than it costs.
Perhaps you’re worried about the debt load of Acme Explosives (ticker: KBOOM). Glance at the notes in its annual report, and you might find that the effective interest rate for its debt is 5 percent. If Acme is putting the borrowed funds to work earning, say, 8 percent, then things aren’t so bad. But if Acme is generating $100 million in cash annually while owing $200 million in annual interest payments, that’s not so good.
When companies need money, they can typically issue more stock or take on debt. Issuing stock might dilute the value of existing shares, so debt might be better. Overall, though, on a balance sheet, little to no debt is best.
Foolish Trivia:
Name that company
I trace my roots to 1997, when my founder launched a “Name Your Own Price” service. Two years later, I went public, ending my first trading day valued at nearly $13 billion. My market value was recently $87 billion. Over the years, I’ve tried selling groceries, gas, long-distance phone service, mortgages, cars and used goods. My focus today is on flights, hotels, car rentals, vacation packages and cruises. I bought Booking.com in 2005, Kayak in 2013 and OpenTable in 2014. I rake in more than $10 billion annually and sport a net profit margin near 20 percent. Who am I?
Last week’s trivia answer
I was born in 1932, not 1738, and began as a modest housewares company that soon bought a bankrupt Vermont furniture factory. In 1939, I launched Early American-style furniture named for a Revolutionary War hero. Who am I? (Answer: Ethan Allen Interiors)