The past weekend at Chez Melvin was dominated by my 10-year-old daughter's birthday party. We had a session at the skating rink, followed by an eight-girl sleepover -- basically a Lord of the Flies scenario with glitter and a soundtrack featuring Katy Perry and Taylor Swift. In the interest of sanity, I often fled to a dark corner of the house and turned to my friends in the online world. One of the better discussions here was with some fellow Real Money contributors and editors, featuring quotes from the classic poker movie Rounders.
One of the best is, "Get your money in when you have the best of it, and protect it when you don't." From the perspective of a value investor, this translates into buying when everything is cheap and no one wants to play, and getting up from the table when the game becomes too exciting.
Right now there are signs that the game is a little too rich, and that caution should rule. Stan Druckenmiller's recent remarks on problems with the U.S. financial system are a clear shot across the economic bow. Starwood (HOT) CEO Barry Sternlicht recently bemoaned the amount of complacency among investors. Sam Zell said last week that he not optimistic, and that he didn't think business was as good as stock prices might seem to indicate; the "grave dancer" thinks prices should be materially lower. These are some very smart people with a good sense of markets and economics who think the market is ahead of itself, and that a pullback or worse may be in order.
I do not trade based on the macroeconomic situation at all, but I have to add my voice to the growing crowd of concerned investors -- because very few new opportunities are being created in the current market. If it is cheap, I probably already own it. For a lot of the inexpensive stocks I purchased back in 2009 and 2010, shares are now approaching levels at which they are looking a little overvalued. I have been doing some prudent pruning, especially among some of the smaller stocks that have moved up to a premium to book value.
I am also monitoring insider-selling activity for stocks to avoid or to consider selling short. Both academic studies and real-world experience show that companies with heavy insider selling usually underperform the markets. One stock that really leaps off the insider-selling sheets right now is Macy's (M). Everyone loved the recent earnings report, and the stock is flirting with 52-week highs and is almost back to the 2007 highs -- but insiders seem to perceive a window, because they've been lining up to sell stock in recent weeks.
To be specific, of late 11 insiders have teamed up to unload more than $25 million worth of Macy's shares. The sellers included CEO Terry Lundgren, who lowered his stake by more than 25%; the CFO; and Board Chairman Jeffrey Kantor, who cut his holding by more than 30%. Macy's has had a good run, and is up almost eightfold since the 2009 bottom. If I owned it, I would join the insiders in selling my stake at current levels. Moreover, chicken shorts like myself may find some decent put spreads in January 2014 options in order to establish a small bet against shares that may have an asymmetric payoff if the shares do in fact decline from here.
Macy's is not the only retailer seeing selling by officers and directors. Saks Fifth Avenue (SKS) is also within striking distance of 52-week highs, and three insiders have sold more than $690,000 worth of stock in the past few weeks. It looks like billionaire Carlos Slim is also scaling out of the stock, given his recent sales. I do not think I would short Saks even using my chicken methods, but I do not think investors have the best of it with this name, and I would be reluctant to get my money in by buying the stock at this price.
I never go net short, and I rarely outright short stocks outside of arbitrage situations. However, for the first time in many months, I am looking for a few stocks that might make good chicken shorts for the very small aggressive portion of my portfolio. More important, I do not feel like I have a huge advantage in buying this market, so I am very cautious about adding any money to the long side right now.