Is MIPS Technologies (Nasdaq: MIPS) headed higher or lower? That''''''''s the question we ask when we evaluate insider buying and selling. We ask because how executives spend their paychecks is often a reflection of what they think of their companies'''''''' prospects.
Of course, not all buys are equal. According to two decades worth of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence From Insider Trading, buying is most predictive when it (a) comes from the CEO or other top-level executive, and (b) it''''''''s performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.
How do MIPS Technologies'''''''' managers measure up against Seyhun''''''''s benchmarks over the past year? See for yourself:
||Bearish; some buying, but at much lower prices than present. Most recent sale near today''''''''s prices.
||A leading designer of microcontrollers for digital TV and other consumer electronics.
|CAPS Stars (out of 5)
|Percentage of Shares Owned by Insiders
|Net Buying (selling)^
|Last Buyer (% increase)
Fred Gibbons, director
4,500 shares at $6.22 apiece on Aug. 13, 2010
(increased direct holdings by 36%).
|Last Seller (% decrease)
Gail Shulman, general counsel
2,266 shares at $14.45 apiece on Nov. 2, 2010
(no direct holdings remaining following sale).
Applied Micro Circuits (Nasdaq: AMCC)
ARM Holdings (Nasdaq: ARMH)
Intel (Nasdaq: INTC)
Source: Form 4 Oracle, Capital IQ, and Motley Fool CAPS. Data current as of Nov. 26. ^Open market sales and purchases only.
What we''''''''re tracking here and why
Insider buying data can be confusing. Here, I''''''''m concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times they''''''''re buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.
Those personal holdings matter the most -- they''''''''re the shares executives hold for investment, rather than compensation. Employee stock options are different; they''''''''re compensatory in the purest sense. I''''''''ve stripped out options-related buying and selling from the calculations you see above.
The Foolish view: bearish
Do insiders really dislike this business? I can''''''''t see how. MIPS'''''''' high-performance microprocessor designs will soon power a new generation of smartphones based on Google''''''''s (Nasdaq: GOOG) Android operating system. That''''''''s one of the main reasons Wall Street expects earnings to grow by 18.75% annually for the foreseeable future.
The wins come at a good time. Consumers are asking mobile devices to do more than they ever have, and that translates into a hankering for additional processing horsepower. MIPS'''''''' "multithreaded" multicore designs allow for that by breaking bits and bytes into digestible chunks that can be processed simultaneously.
Or, in English: MIPS chipsets are really efficient, and therefore really fast.
"The best processor architecture there is out there. M&A potential. Earnings growth. What else can you say?" Foolish investor LoveMeSomeGreen wrote in recommending the stock earlier this month.
MIPS'''''''' valuation also looks reasonable to me. The stock trades for 24 times next year''''''''s estimated earnings, which are expected to grow 15%. Yes, that''''''''s a premium, but my sense is analysts are low-balling the impact of Android chipset sales, which could be huge.
There''''''''s only one problem with this thesis: The insider action doesn''''''''t support it. Board member Fred Gibbons was the last to buy -- over the summer, before shares of MIPS doubled. After the run-up, General Counsel Gail Shulman cashed out all her direct holdings. The message? Now''''''''s the time to sell.
Color me unconvinced. MIPS'''''''' growth opportunity is too large to sell now. Instead, I''''''''ve rated the stock to outperform in my CAPS portfolio. Do you agree? Disagree? Log on to Motley Fool CAPS today and tell us how you would rate MIPS Technologies. You can also add the stock to your watchlist.
And if you want me to take a Foolish peek at the insider action of your favorite stock, email me here, reply to me on Twitter, or use the comments box below. I''''''''ll write this column as often as you, our readers, demand.
© 2010 UCLICK L.L.C.