Insider Buying

2iQ Insider Brief: A short Facebook story

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Can Mark Zuckerberg’s accelerated selling of Facebook stock be explained?

Nobody has a better insight into a company’s prospects than its top-level directors. That’s why investors tend to take notice when a CEO or a CFO buys or sells large quantities of company stock. Large director purchases are a signal of confidence and are generally a bullish signal, whereas large director sales can raise eyebrows.

Insider selling

One company that has been receiving considerable attention in relation to director selling recently is Facebook (NASDAQ: FB).

In the second quarter of 2018, top executives at Facebook sold 13.6 million shares, up from 9.8 million shares in the first quarter of 2018 and nearly triple the amount of shares sold in the last quarter of 2017.

Chart 1: Quarterly volume of Facebook shares sold by executives

Facebook Story_Chart 1

 Source: 2iQ

Of the 16.3 million shares sold by top-level Facebook executives in the second quarter, the vast majority were sold by founder and CEO Mark Zuckerberg, who offloaded 13 million shares during the quarter. That was double what he sold in the first quarter of 2018 and approximately 10 times the number he sold in the fourth quarter of 2017.

Questionable timing

This high level of director selling would generate investor curiosity at the best of times. However, the intense selling pattern is even more interesting when you consider the pressure that the company has been under recently from the Cambridge Analytica data-mining scandal, as well as the group’s second-quarter results which missed expectations and saw the stock plummet nearly 20%.

Since the Cambridge Analytica scandal first surfaced on March 17, eight Facebook insiders have combined to sell approximately $3.9 billion worth of stock, with Zuckerberg accounting for around 90% of this selling activity.

Chart 2 below shows just how intense Zuckerberg’s recent selling activity has been.

Chart 2: Mark Zuckerberg's selling activity

Facebook Story_Chart 3-1

Source: 2iQ

Naturally, many investors are concerned about this high level of selling activity from Zuckerberg and other top-tier Facebook executives. At face value, it doesn’t look good for the company.

Yet, can Zuckerberg’s selling be explained?

Predetermined selling plan

A closer analysis of Zuckerberg’s recent selling activity reveals that the sales were actually part of a predetermined selling plan and that the CEO made his intentions known to investors last year.

For example, in September 2017, Facebook announced that Zuckerberg would sell between 35 million and 75 million shares – nearly $13 billion worth of stock at the time – in the following 18 months, through a 10b5-1 selling plan (a pre-approved selling mechanism that is completely legal and enables insiders to set up a predetermined trading plan to sell stock at regular intervals, without being accused of insider trading).  That’s between 1.94 million and 4.17 million shares per month, on average.

Often, 10b5-1 selling plans are never made public and investors will only find out that directors have sold after the sale has been published on the SEC website. So the fact that Facebook voluntarily disclosed Zuckerberg’s intention to sell vast quantities of stock suggests that the company wanted to treat investors fairly.

Chart 3: Value of shares sold by Facebook insiders

Facebook Story_Chart 3

Source: 2iQ

It’s also worth pointing out that Zuckerberg stated that the sales are for his philanthropic initiatives, with the sale proceeds designed to fund philanthropic efforts in health and education.

Zuckerberg said at the time: “Over the past year-and-a-half, Facebook’s business has performed well and the value of our stock has grown to the point that I can fully fund our philanthropy and retain voting control of Facebook for 20 years or more.

So, it’s clear that the market knew that Zuckerberg would be selling large quantities of stock this year.

Accelerated selling

But what about the fact that the selling has been accelerated in recent months? Is this linked to the recent Cambridge Analytica scandal or the recent results which missed expectations? Has Zuckerberg been trading on inside information?

There’s no evidence, at this stage, to suggest that Zuckerberg has been acting on inside information and looking to dump stock before the stock crashed.

The most likely explanation for the recent intense selling activity is that Zuckerberg’s 10b5-1 selling plan has different trigger prices. In other words, the higher the share price, the more stock sold.

Chart 4: Average daily number of shares sold by Mark Zuckerberg for a price range March '18 - July '18

Facebook Story_Chart 4-2

Source: 2iQ

Predetermined 10b5-1 selling plans don’t usually get altered, and the selling pattern is usually determined by a third party, trustee or algorithm in advance. So, Zuckerberg’s recent selling activity is most likely due to the fact that Facebook’s share price has surged higher this year. Ultimately, Zuckerberg’s recent selling activity looks like a case of good timing.