CEO Ruins Stock…

| August 27, 2010 | 0 Comments

A few months ago, I told readers about a stock ready to double.  And in only two short months, the stock jumped from around $10 to over $21.

But there’s a new development.  I’ll tell you what to do in a moment…

First though, a little background.

The company I mentioned a while back is Industrial Services of America (IDSA).

IDSA recycles stainless steel, ferrous, and non-ferrous metals.  They purchase scrap metal from industrial and commercial companies.  Then they sort, shear, cut, shred, and bale it.  The bales of recycled goods are sold to steel mills and other end users.

In essence, they turn one man’s trash into treasure for their share-holders.  And they’re doing a mighty fine job of it too.

Just look at their second quarter earnings.  The results are nothing short of spectacular.

Revenue skyrocketed by 137%!  And earning catapulted by 155%! Earnings per share jumped from $0.17 last year to $0.36 this year.

The catalyst for their tremendous growth spurt was boosting capacity. They added new equipment in July 2009.  And they also expanded into stainless steel recycling.

The business expanded almost overnight.  But that’s where the good news ends.

I think IDSA is heading for trouble.

Here’s why…

Back on July 21st, IDSA was trading for about $12.  Management released earnings guidance of $0.33 to $0.38 for the quarter.

The stock went parabolic on the news.  It shot from $12 to over $21 in two weeks.

But at the same time, insiders began dumping shares left and right.  The president and COO, CEO, and CFO are all selling stock like crazy.

Since issuing earnings guidance, insiders have sold a total of 97,000 shares in nine separate sales.

When IDSA released their actual earnings, they came in at $0.36 per share.  And the stock has fallen back to around $14.

If you ask me, this smells a little fishy.  Why is management inflating guidance just a few weeks before releasing actual earnings and selling into the ensuing rally?

I think insiders are selling for a reason.

They realize the easy comparisons to quarters prior to the expansion are over.  Going forward, growth will be measured against quarters after the expansion.  That means big revenue and earnings growth isn’t going to happen.

They knew it was their last chance to release astronomical growth guidance.  And they played it up to a T.  They lined their pockets by selling stock at an inflated price.

I’m not a fan of insiders pulling stunts like this.

If you didn’t sell for a double when you had the chance, go ahead and sell IDSA now.  Take your 40% profits and run.  The easy money has already been made.

Insider shenanigans and tougher year of year comparisons going forward are all the reason we need to cut this stock loose.

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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