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Insiders Are Dumping This Stock -- Here's Why I'm Not Worried

Thursday, February 6, 2014 - 10:00am

I love stories about regular people who have excelled in their chosen profession. The hedge fund and financial world is rife with tales of individuals who have built vast fortunes despite starting from modest beginnings.

To me, the most inspiring stories are about people who have fought their way to top, been knocked down, and then regained their top-dog status. These people are generally mavericks who go against the grain --and, in the financial realm, can find value in overlooked stocks that most of the investment world can't readily see.

One of my favorite consistently successful money managers is Ken Griffin of hedge fund Citadel LLC. Griffin started trading out of his college dorm room in 1986. He was so successful that he was quickly able to raise a million dollars from investors. By 1990, Griffin launched the Citadel Investment Group with a little over $4 million. This fund has grown to one of the largest hedge funds in the world with over $17 billion under management.

Griffin's trip to the top has not been without its tribulations. One example is that during the financial crisis, Citadel sustained a drawdown of nearly 50%. During this time, many hedge fund managers quietly closed their doors after experiencing similar losses.

Remember, after a 50% loss, it takes a 100% return to get back to even!

After that drawdown, Griffin went to work lifting Citadel back into profitable territory. After clawing back to even, Citadel cleared gains of 20% in 2011 and 25% in 2012; as of October, the fund was higher by 11% for 2013.

Griffin has been quietly snapping up shares of Monolithic Power Systems (Nasdaq: MPWR). I would have never heard of this little-known semiconductor company if not for Citadel's 13F filings. The fund increased its holdings in the most recent quarter to just over 1.9 million shares. Citadel now controls about 5% of the outstanding shares.

Launched in 1997 and based in San Jose, Calif., Monolithic Power Systems specializes in analog and mixed-signal semiconductors for the computer, consumer and industrial markets. Monolithic boasts a market cap of $1.28 billion, quarterly revenue growth of 15.6%, and operating cash flow of nearly $42 million over the past 12 months. Shares are up nearly 50% over the past 52 weeks, with the majority of the outstanding shares being institutionally owned. It posted a strong third quarter with just over $65 million of revenue, a more than 13% increase from the second quarter's nearly $58 million.

Fundamentally, the company appears to be strong and thriving. However, it's critical to note that there has been a rash of insider selling over the past six months, with zero insider buys. There have been 42 separate insider sales, totaling nearly 470,000 shares -- just over 10% of the total outstanding insider ownership.

It's impossible to tell why such a significant number shares have been sold by insiders. I am concerned that there has not been any insider buying, but the selling itself does not have me overly worried.

Shares have been trending up since the first week of August. A sharp sell-off occurred in mid-October, but the weakness was immediately bought with share prices resuming the upward trajectory.

Risks to Consider: Just because a successful hedge fund manager is buying a stock does not mean the stock is a guaranteed winner. Hedge fund managers can and do make poor investments. In addition, although I am not concerned about the insider selling level, it may be signaling something internally wrong with the company. Always use stop-loss orders and diversify when investing.

Action to Take --> I like Monolithic as a pullback buy candidate. MPWR has fallen close to $4 from its highs in the $34.50 range, But solid technical support exists at the 200-day simple moving average of $29. Dollar-cost averaging into a long position now makes good sense from a risk/reward standpoint. Should the 200-day simple moving average fail as support, stops should be placed just below $28 or a point below the current 200-day moving average. My nine-month target price is $36.

P.S. Stock ownership by investing "gurus" like Ken Griffin are just one of the criteria StreetAuthority's Michael J. Carr looks at when deciding what to recommend in his premium advisory, Guru Trader. The system he's perfected during his 26-year trading career not only screens for stocks owned by gurus like George Soros, Carl Icahn or Warren Buffett -- but it actually tells him what to buy and when to buy and sell. Click here to get his next "guru trade" in your inbox...

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.