Insiders are selling; should you?

In a two-day span earlier this month, Matthew Szulik, the chairman of Linux software company Red Hat, sold more than a half-million shares of the company.

This year through Nov. 13, Szulik has sold 681,385 shares of the Raleigh-based company, according to data compiled by The Washington Service, a research firm.

He's not the only executive to sell big chunks of shares. Last year's stock market nosedive prompted insiders at publicly traded companies nationwide to hold onto their shares, so this year we're seeing an uptick in sales along with the market's revival, said Ben Silverman, director of research at InsiderScore, which tracks insiders' moves.

Think of it as pent-up demand.

In the Triangle, there has been a flurry of big sales by a number of insiders at Red Hat and at LED lighting company Cree. Three Cree insiders have sold a total of more than 700,000 shares. At Red Hat, in addition to Szulik, four insiders have collectively sold more than 400,000 shares.

For the executives, it can be a rich experience.

The more than half-million shares that Szulik sold Nov. 11 and 12 netted him a gain in excess of $8million - the difference between the sale price and the price he paid for the shares by exercising his stock options.

Analysts who follow Red Hat and Cree say the insider sales at those companies shouldn't concern investors given the considerable appreciation of their stock. Red Hat shares have doubled since the end of 2008; Cree shares have tripled in value.

Harsh Kumar, a Morgan Keegan & Co. analyst who tracks Cree, said of the insider sales, "Let's be realistic about it. The stock has made a humongous move. ... A lot of these guys, all their wealth is tied to one stock."

What the sales mean

When insiders are buying up shares, it's usually considered a sign of confidence, and investors love to see that.

After Charles & Colvard's new CEO recently disclosed that he had bought 25,000 shares - a move that came a week after the maker of moissanite gems announced plans to buy back 1million shares - the stock closed above $1 for the first time since July 2008.

But insiders can sell shares for a variety of reasons, and interpreting the signs isn't easy.

Executives may need the money to send a kid to college, or they may want to buy a beach house or pay income tax. The tricky part is that they also may sell when they conclude that the share price is at or near its peak.

Moreover, to insulate themselves from accusations that they are illegally trading on inside information, some executives set up pre-arranged plans to sell shares.

Szulik has such a plan, according to documents filed with the Securities and Exchange Commission. Details of the plan aren't included in the disclosure.

Red Hat spokeswoman Kara Schiltz said of the sales by Szulik and others, "From time to time executives will sell shares for estate planning and to diversify, and may also do so when options are expiring."

Adam Derbyshire, the chief financial officer of Raleigh-based Salix Pharmaceuticals, whose drugs treat a variety of gastrointestinal diseases, also has a pre-arranged sales plan. Starting in May, he sold 3,000 shares every Wednesday. In early September, he increased his weekly sales to 5,000 shares. Total sales so far this year: 138,000 shares.

Derbyshire established his sales plan because he has stock options that expire next year, Salix spokesman Mike Freeman said. That's relevant because stock options are use-it-or-lose it; if you don't exercise the options by buying the shares before the expiration date, you lose the opportunity to acquire them. The price insiders pay for stock options frequently is the price the shares fetched when the options were awarded.

Freeman said Derbyshire has been simultaneously exercising his stock options and then selling the shares to cover the income taxes stemming from his gains, and to diversify his holdings.

Simultaneous "exercise and sell" transactions are the most common maneuver among executives exercising options, Silverman said.

That's partially because of the tax bills incurred, he said, but also because executives tend to view options as compensation rather than a way to build equity.

A myriad of other factors also come into play when analyzing insider sales.

Silverman views the sales by Cree CEO Chuck Swoboda as a negative because it's a reversal of his position last December, when he was a buyer rather than a seller. Even though Cree shares are trading much higher these days, Silverman said such a switch in less than a year's time is quick where insiders are concerned.

Swoboda has sold 408,000 shares this year.

But Cree spokeswomanMichelle Murray said many of the "exercise and sell" trans actions by Swoboda and other Cree executives involved options that were set to expire. She said Swoboda has a pre-arranged plan for selling shares, and had held theoptions an average of seven years.

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