SEC filings can have an immense impact on stocks you hold. Unfortunately, they are often confusing and time-consuming to fully understand. In this week’s topic of the week, we will discuss Form 4s, how to read them and more.
What are Form 4s?
Form 4s are SEC filings regarding insider trading. A form 4 is required to be filed “before the end of the second business day following a change in ownership.” The general codes you will see for Form 4s in small cap biotech are:
- P – Open market or private purchase of securities
- S – Open market or private sale of securities
- A – Grant, award, or other acquisition
- D – Sale (or disposition) back to the issuer of the securities
- M – Exercise or conversion of derivative security
- C – Conversion of derivative security (usually options)
- O – Exercise of out-of-the-money derivative securities (usually options)
- X – Exercise of in-the-money or at-the-money derivatives securities (usually options)
Insider Buy/Sell on the open market or privately (code P)
The most well-known scenario is when an insider buys or sells shares. Naturally, the market perceives buys as bullish and sells as bearish although it’s not that black and white in reality. Many executives are compensated with stock or options over cash and so, selling it is like cashing a paycheck (example below). This is more common in well-established, commercial, or late-state biopharma companies that have appreciated significantly.
The example below is a Form 4 shows that on 8/12/20 Chief Financial Officer (CFO) of BioCryst Pharmaceuticals (Nasdaq: BCRX) Anthony Doyle purchased 54K shares at $4.08 per share. Following the purchase he directly (D) owned 54K share
Exercise of Stock Options(codes M A,and D)
In this example, an officer of Karyopharm Therapeutics (Nasdaq: KPTI) exercised/converted (M) 10,054 shares at $6.54 per share thus acquiring (A) them, and then sold/disposed of (D) the shares at the current market price of $14.98 that same day. If he would have instead purchased those sharesThe difference (profit) served as part of the officer’s compensation. In the bottom left-hand corner of the From under “Explanations of Responses” more details may be provided regarding the transaction. In this case, we see that the officer executes the trade in accordance with a 10b5-1 trading plan and also the schedule by which the shares vest (25% on 1/15/17 and 75% over the proceeding 36-months).
Stock Compensation For Directors (codes A and D)
Similar to how an employee may be compensated with stock or stock options so can members of the board of directors in lieu of cash. In the example below, a director (Robert Ingram) of BCRX was compensated with 4,518 shares at $4.15 per share on 8/31/20 in lieu of his quarterly cash retainer of $18,750.
Insiders buy and sell for many reasons. Overall, there generally appears to be a seasonality to these transactions as directors sell for tax purposes, purchasing properties and other personal activities in their life. On the other hand, insiders buying can come in many forms such as; shares granted as part of their salary package, shares issued when options are converted, and shares purchased on the market. The bullish sentiment behind open market purchases by directors argues; “insiders sell for many reasons, but they buy on the open market for one reason” (arguing that the insiders believe the company is undervalued). In general, we pay attention to the following when reviewing Form 4s;
- Size of the transaction (i.e. how many shares were exercised and/or acquired). Did they immediately dispose (sell) them? Or did they hold them thus increasing their net position
- How many shares does the individual or entity have in total? From here we can evaluate the percent of their total holding which this transaction represents.
- Who is the individual or entity? Does this transaction fundamentally change your investment thesis?