The Biotech Investing Penalty Box
Added to the penalty box on 4-April-2014
Reason: Hasty Insider Selling
Fate Therapeutics (NASDAQ: FATE) is a somewhat recent IPO. They priced their public offering on October 1st, raising $40 million. Since then the stock has traded as high as $13.50, and closed yesterday at $8.57. The issue I have with Fate is how executives have already started long-term plans to sell stock just one day after the company's IPO lockup expired. A lockup is the period after the IPO during which insiders and other large holders cannot sell stock. Fate's expired on March 31, and already four 10b5-1 selling plans have kicked into gear the day after:
Executives create 10b5-1 plans so they can sell or buy stock at set time intervals (or prices) over the long term without running into insider trading issues. From an investor's standpoint, these plans can be frustrating because you often have no idea what the agreement looks like. It can be minor or major. In this case, the insiders might be selling stock just this one time, once a month, or once a quarter. Investors are largely in the dark.
Creating these plans and selling stock so soon is a deal breaker for me for the following reasons:
First, while I do appreciate that people need to make a living, the public markets are not meant to be a personal piggy bank for every new company. Selling stock on a frequent basis so soon after the IPO is poor form. Maybe these particular plans are set up to sell only a couple of times, but I'm not interested in sticking around to see how it plays out.
Second, Fate has not accomplished anything significant yet, and the performance of the stock has not been very good. There is a confidence issue here. Are the executives OK with selling at such a relatively low price? That is the type of question you start asking yourself when you see things like this. You can bet Fate's shareholders have loftier expectations than $8.00, so it would be nice to see insiders of the same mindset. It would be a different story if the stock had doubled or tripled, as other recent biotech IPOs have done.
Finally, these things make you wonder what kind of compensation practices Fate will have going forward. Investors want to see executives rewarded well for accomplishing big things. By nickel and diming the process like this, you have to wonder how seriously the company takes incentives and other compensations matters.
Who Am I?
I'm an individual investor from Kansas City. My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>