Gudovac1941: American SuperConductor (AMSC) - Why Buy when Yurek Sells ?

Gudovac would like to remind his readers of those 2 critical questions when faced with an opportunity. The first question is does management serve stockholders' interests. The second question is to whom do the economic rents of an Enterprise accrue; owners or managers.

Gudovac thought it might be useful to examine this question using American Superconductor (AMSC) as an example. American Superconductor is a fine technology development Enterprise which should generate oversized returns in the medium and long term.

However, the oversized returns of AMSC will accrue to Management and not to Owners. Evidence of Management's getting the lion's share of rents from AMSC have been suggested by Gudovac before.

This article explores the question: Does Management serve stockholder's interests ? There are numerous ways of framing the owner-agent quandary. Stock ownership is always high on everyone's list of how to verify the alignment of interests between Owners and their Hired Hands.

An ideal situation is one in which Management starves if their stockholders lose money. Not Possible ?

LBO Shops (aka Private Equity) to negotiate employment packages in which Management gets paid a base wage significantly lower than customary. Management then gets the opportunity to reap extraordinary gains if and only if the Buy Out Shop generates large returns on its investment. LBO Shops also offer their Hired Hands the chance to invest capital 'alongside' the LBO shop. The LBO shop will even help the Hired Hand get a 2nd Mortgage on their house if he wants to maximize the opportunity. Is that Manager going to starve if he can't make money on the stock ? You betcha !

If a Buy Out shop can demand this level of alignment between owners and management - wouldn't its be reasonable that Owners of Public Companies have similar expectations of their management ?

Let us return to the case of AMSC.

Let us examine how much faith Management has in AMSC's future.

Let us examine how aligned Management is with the interests of stockholders.

Let us examine how much common stock Management is buying in AMSC.

Let us examine at what prices does Management invest their hard earned money into AMSC ?

The example of the CEO and Founder Greg Yurek is instructive. Gudovac examined SEC filings for Greg Yurek to determine at what price Dr. Yurek buys AMSC shares. How many shares did Yurek buy last Autumn when the shares fell below $10 ?

Zero

That's right Kiddos - the Founder and CEO of AMSC , Greg Yurek, - believes that AMSC shares are worth less than $10 per share. At $10 per share,Yurek still refused to buy. Instead of buying when AMSC shares dropped below $10 with his hard earned cash, Greg Yurek is taking his money out of AMSC.

Greg Yurek has been steadily betting against AMSC for a long time. Yurek has been selling shares just about as fast as he can. Yurek does buy shares through his stock option plan - but he appears to like to turn around and sell these shares quickly, usually the same day for a tidy profit.

In the last few months, Yurek has taken a net $1.4 million from AMSC shareholders. Yes, this money come from AMSC shareholders. When Yurek sells his shares, someone buys them. The following chart summarizes Yurek's share transactions since June. How'd you like to be the 'investor' who bought Yurek's shares on 1.Sept ? If Yurek sells at $27, why would anyone buy at a higher price ?

Gudovac searched the SEC records back through 2006 and found a consistent pattern of betting against AMSC from Yurek. Now, Management and its Sell-Side PR flacks will be able to generate numerous justifications for consistent selling. Some of these reasons might even be plausible.

However, what the PR flacks can never escape is the simple fact: When Management sells, they have determined that their money is better placed elsewhere.

AMSC is good company with a great future. Owners need to determine how much of that future will accrue to Managers and how much will accrue to Owners.