Big Lots Could Be in Big Trouble

The Securities and Exchange Commission is reportedly probing Steven Fishman, the CEO of discount clothing retailer Big Lots Inc. (NYSE:BIG), over a dubious sale of company stock. Fishman, who coincidentally informed his board on Tuesday that he will be retiring, sold $10 million in stock about one month before a regularly-scheduled filing revealed a slowdown in sales that triggered a 24 percent single-day drop the stock price.

Just One of Many

The SEC investigation into Fishman’s trade is just one of several that has made headlines recently. The Wall Street Journal published a report last week examining thousands of trades made by executives and revealed a pattern that suggests the regulatory environment surrounding executive trading of company stock is highly disorganized and presents a lot of gray area that leaves room for shady behavior.

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Fishman is not even the shadiest character in this story. A father-daughter pair, Jerrold Rosenbaum and Beth Angelo of Body Central (NASDAQ:BODY), a specialty retailer of women’s apparel, sold a combined $2.9 million of company stock in the three days immediately preceding an announcement that slashed the company’s 2012 earnings estimate. The news triggered a 48.5 percent decline in the company’s stock price.

The report details other examples of questionable behavior by executives at companies buying and selling their own stock at highly opportune times. A common thread is that most companies involved are relatively small. Body Central has a market capitalization of about $163 million and an average daily trade volume of just 260,794 over the past three months. There are not a lot of people watching these stocks…

It’s important to keep in mind that there are no charges or formal accusations to date. However, Big Lots is particularly interesting given how large it is relative to the other companies being examined. Big Lots has a market cap of $1.7 billion and an average daily trading volume of 1.3 million over the last three months.

On December 5, as news of the SEC investigation spreads, trade volume for Big Lots passed its average before noon with shares off about 3.5 percent. The uncertainty raised by speculation is clearly catalyzing a sell off.

CHEAT SHEET Analysis: Are These the People You Want in Charge?

If you have to cheat to win, you clearly aren’t very good at the game. One of the core components of our CHEAT SHEET investing framework asks us to investigate whether A-Level managers are jockeying the horse. No matter how thoroughbred a horse, the jockey is critical to success. Investors who think an executive is up to no good won’t want to leave their money with the company.

Fishman’s actions don’t speak for the entire company but the investor reaction to the news indicates a reasonable level of suspicion. Any fraudulent behavior has yet to be confirmed, but it’s appropriate to proceed cautiously when news like this breaks.

Speculation aside, Big Lots has been fighting a losing battle against economic headwinds and tough competition from Dollar General (NYSE:DG) and Wal-Mart (NYSE:WMT), which are both beating the S&P 500 this year to date while shares of Big Lots have come down over 18 percent in the period.

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