Insider Selling, Analysts Recommendations and Aegean's 18% Drop
By Chandler Lutz
October 26, 2007
If you were to make a list of the hottest stocks in the last month, Aegean Marine Petroleum (ANW) would definitely be towards the top. In the last month, Aegean’s stock price has more than doubled. As I pointed out in earlier article, the main factor in the large increase of Aegean stock was a buy recommendation from an analyst at Jefferies & Co. The Jefferies’ analyst claimed that the shares were worth around $42 and they levitated to that price in quick fashion.
During the last month things at Aegean were progressing quite nicely as the company started its own lubricant line as well as acquiring a smaller competitor, Bunkers at Sea. Both of these moves by management fit perfectly into Aegean’s current business model and the market showed its satisfaction in each case as the stock rose even further.
Aegean investors could not have been happier with their returns until on October 25, 2007, the company announced a second stock offering in which a director of the company is selling 250,000 thousand shares and the founder, Dimitris Melisanidis, is offering 6.5 million shares. Initially, these actions may make once content investors nervous wrecks especially with an earnings release in the near-term future. However, as the company stated in its press release, none of the funds will return to the company and the second offering is just a typical insider sell. As you know, insider selling is never a justifiable reason to not buy or sell a company. Insiders sell for all sorts of reason, some of which may have nothing to do with the company’s prospects. Also, the two sellers, especially Mr. Melisanidis, will still have a major stake in the firm after the transaction is complete. Even though this offering, which is more aptly described as an aggrandized insider sell, is disheartening to Aegean’s shareholders, it is not reason to reduce a holding in Aegean.
Once Mr. Market got hold of the news he acted vehemently. On that day Aegean’s stock price dropped from a high of $46.26 to a close of $37.95, a painful 18 percent. Many acute investors (one of which, unfortunately, was not me) must have noticed the folly of Mr. Market’s actions as the company’s shares jumped back up to $41.67 the next day.
So far, the moral of this story is that insider selling needs to be accounted for, but definitely can’t be the reason to ever not buy or sell a stock.
Also, as I mentioned above, the firm Jefferies & Co is quite responsible for the increase in Aegean’s price. If you read Aegean’s press release about the second offering you will notice that Jefferies is going to be an underwriter and Bear Stearns is going to be the lead manager. On January 17, 2007 and September 14, 2007 analysts from Bear Sterns and Jefferies, respectively, initiated coverage on Aegean with an outperform call. Since these two firms are both working on the second offering there is an obvious conflict of interest. I am not accusing either firm of directly manipulating the company’s price in any that would affect the offering, but only saying that the potential is there. Before investors take analyst recommendations too seriously they need to remind themselves that Wall Street companies are profit maximizing firms and don’t necessarily have best interests of the public in mind. I guess the second moral of this story is not to take analyst buy and sell calls too seriously and do the research yourself.
Chandler Lutz owns shares of ANW