Chip gear insiders sell prior to declines

In the months preceding the recent insider activity, this group of stocks had each reached all-time highs. However, three of these stocks were down significantly from their highs when the disposals began, and the shares of all four companies fell by at least 15 percent, and as much as 40 percent, subsequent to the selling.

The industry has lost momentum as some analysts fear that the recently announced delays by customers ordering from Kulicke and Soffa may signal a slowdown in the business cycle. Investors are concerned that the personal computer market may be sagging in Europe and domestically, as evidenced by the recent disappointing revenues from Dell. PC manufacturers account for a large part of semiconductor demand, which directly affects equipment manufacturers.

Applied Materials, the world's largest manufacturer of chip equipment, had three insider distributions totaling 228,000 shares between May 18 and July 7. Chief executive James Morgan and directors Philip Gerdine and Tsuyoshi Kawanishi reduced their holdings by 138,000, 72,000 and 18,000 shares, respectively, at prices between $88.38 and $90.99. All three disposals were related to options exercised--Kawanishi's options were set to expire in October 2001, while Morgan's and Gerdine's had expiration dates of December and October 2000, respectively.

In February, four Applied Materials insiders, including Morgan, reduced their holdings by a combined 483,000 shares, also at the $90-level (amounts and prices are adjusted to reflect a 2-for-1 split in mid-March). Applied Materials shares reached an all-time high of $115.00 in April, but had fallen more than 20 percent by the time the most recent selling began. Shares are now trading in the mid-$80s.

On Aug. 9, Applied Materials reported fiscal third-quarter net income of $604 million (70 cents per diluted share), up 136 percent from $256 million (31 cents per diluted share) from the same quarter in 1999. The consensus analyst estimate for the quarter was 68 cents.

At Teradyne, the industry's second-largest firm, two executives sold a combined 12,200 shares between May 1 and June 6 at prices ranging from $96.50 to $112. Vice president Jeffrey Hotchkiss disposed of 10,000 shares, while director James Prestridge Jr. sold 2,200 shares that were related to options that were not set to expire until May 2002. Shares hit their all-time high of $115.43 on the day the selling began, but had declined 16 percent by the time the distributions ended. Shares are currently trading in the high-60s. It should be noted that Teradyne insiders have historically been very active sellers.

Six Cree executives distributed a total of 121,800 shares from May 1 to June 2 at prices between $123.83 and $148.62. Chief executive F. Neal Hunter led with 45,000 shares, while directors Dolph Von Arx and John Palmour made 40,000- and 15,000-share distributions, respectively. Chief operating officer Charles Swoboda reduced his holdings by 10,000 shares. Four of the six disposals were in relation to exercised options that were set to expire between January 2007 and July 2007. With the exception of a sale by vice president Calvin Cobbs Jr. in April at the $146-level, Cree insiders had not actively sold shares in the open market since November 1999. In March, the stock reached $202, its highest price to date, but had declined 25 percent by the time the selling started. Six Cree shares are now trading at about $140.

Credence Systems had four executives disposing of a combined 134,534 shares between May 30 and June 22. Chief operating officer David Ranhoff and chief financial officer Dennis Wolf sold 57,534 and 55,000 shares, respectively, while chief executive Graham Siddall made a 20,000-share distribution. Director Jon Tompkins rounded out the selling with 2,000 shares. When Credence Systems insiders last reduced their holdings in December 1999, the stock was trading in the $33-$43 range.

By May, Credence Systems shares were at their all-time high of $79.37, but had fallen 35 percent by the time Wolf led off the recent distribution. At its current price in the mid-50s, the shares have slid another 25 percent since the selling ended.

Insider selling is often quite prevalent within the semiconductor industry as executive compensation typically includes a significant option component. This selling is especially pronounced when the industry is in the upswing of its business cycle and insiders elect to engage in profit taking following significant price gains.

It will be interesting to monitor the group in the coming months to ascertain if the selling activity represents simple profit taking or rather a signal that the recent downturn is a harbinger of weaker demand ahead.

Kevin Schwenger contributed to this article.