When the Owners Are Getting Out, Is It Time for You to Sell Too?

Do certain substantial shareholders think the stock market has peaked? With the index just 3% below its zenith of November 2007, this question should be in the minds of investors.

At least three shareholders with substantial holdings in their companies sold shares in the past week, joining others who have similarly lightened their portfolios since the beginning of the year.

Sales by substantial shareholders are not necessarily an indication that they think their shares have exhausted their growth potential. Sometimes a shareholder simply needs the cash.

Even so, this smells like the start of a trend.

The sale of shares by a substantial shareholder is usually a bad sign for investors - particularly if the sellers are in the category of shareholders who rarely downsize their holdings. Major shareholders usually sell shares when they feel there is a significant gap between a company's fair value and its market capitalization.

On Tuesday, the TA-25 index of large-cap companies reached 1,196 points - within 3% of its record high of November 2007. Alongside the increase in share prices, the issuing market is also recovering: Even companies with no rating are managing to attract investors. Optimism is palpable in the initial public offering market as well, though there have been no big IPOs here since 2007. And these trends have been bolstered by positive reviews from foreign investment banks.

Recently, however, there has been evidence of some pessimism, too. The investment analyst Marc Faber, who predicted the stock market crash of 1987, forecast in an interview with Bloomberg two weeks ago that the American stock market would likely slide by at least 20% and the euro would continue to decline. Since Israel is very dependent on the global economy - and particularly that of the United States, which is its major export destination - this warning applies to Israel, too.

Before deciding to take your cue from substantial shareholders and sell shares, remember that substantial shareholders can also make mistakes, and not every sale of shares indicates that their price is excessive. Nevertheless, it is worth taking note of this week's sales.

On Wednesday, Lazard East Management sold NIS 200 million worth of Delek Automotive shares, acting through Clal Finance. With that, Lazard has completely exited its holdings in Delek Automotive, which imports Ford and Mazda vehicles to Israel. Since the start of the year, Delek Auto shares have gained 10%, and over the last 12 months, they have gained 162%, bringing the company's market cap to NIS 4.2 billion.

Incidentally, Delek Auto's own CEO, Gil Agmon, owns more than 16% of its stock.

Also on Wednesday, Ashtrom Properties sold NIS 55 million worth of shares in another real estate company, Nitsba, through Leader Capital Markets and Rosario. But it still owns 3% of Nitsba.

That same day, shares of mineral water company Mayanot Eden shot up 10.6% on unusually heavy turnover of NIS 8.5 million. That is particularly noteworthy because it occurred just one day after controlling shareholder Giora Naftali sold 400,000 shares in the company for NIS 6.6 million.

But since the start of 2010, Mayanot Eden stock has gained 261%, lifting the company's market cap to NIS 178 million. That's powerful temptation to cash out. And Naftali didn't exit his stake entirely, he just reduced it from 10.7% to 7.9%.

Naftali's brothers, Roni and Yehuda, control the company jointly with him. The three brothers also own the controlling interest in shopping center developer BIG.

In another case a little farther back, at the end of January, the Israel Corporation sold 0.6% of Israel Chemicals for NIS 400 million in a deal brokered by UBS. The deal was all the more remarkable because since buying the controlling interest in ICL 10 years ago, Israel Corp. had hardly sold any stock. However, it may have done so to gain liquidity for investment in Better Place, Shai Agassi's electric-car infrastructure company.