We introduced shorting (actually, selling calls) DineEquity (DIN) as a trading idea a couple of days ago. Insiders are selling a competitor with similar price rises and a much better balance sheet..
We agree, it’s a bit guilt by association, but the whole sector really showed the same graph, and we feel that they need to correct badly. We have argued that the best has already past in DineEquity, at least for now.
Insiders on Selling Rampage
Led by Chief Executive Steve Ells, Chipotle Mexican Grill (CMG) insiders sold over 230,000 shares in April. This large number of sales by insiders has investors wondering if they should follow the lead from those who know the company best.
Chipotle Grill was one of Wall Street’s most successful initial public offerings, soaring from the IPO price of $22 in early 2006 to $150 at year end 2007. The stock sold off to a low of $36.86 during the 2008 market crash but has subsequently soared back to $81 per share.
Why Diversify Now?
CMG has a very strong balance sheet, the latest quarter shows revenue growth of almost 20% and the stock price is rebounding. Why, with such good news, would insiders have sold almost as many shares in April 2009 as they have sold in total since the company went public? The company’s spin on the reason for the huge sale of shares came right out of the standard public relations manual. A Chipotle spokesman said that the reason for the stock sales was due to a desire by company insiders to “diversify” their holdings.
The big unanswered question, of course, is why the sudden urge to diversify at this point in time? Many of the shares sold were from recently exercised stock options, so the standard diversification reason may have some merit. As an investor, however, it is better to watch what the owners of a company do, rather than what they say. No matter how strong the urge to “diversify”, no one sells large amounts of stock if he thinks the stock price is heading higher. Insider behavior here suggests that CMG may see weaker earnings and a lower stock price in the near future.
Shorts Bet Big On Chipotle
Another indicator that someone is betting big on a decline in CMG is shown in the latest short interest figures reported as of April 15, 2009. Although the total short interest declined by 7.5% to 6.9 million shares, CMG is ranked number 31 on the NYSE list of companies having the largest short interest ratio. The shorts are aggressive in CMG and are obviously looking to cover at lower prices. Eat the tacos – avoid the stock.