It was just five weeks ago that the two stocks highlighted in my June 17^th article, “Top Tech Takeover Targets”, Applied Optoelectronics (AAOI) and Synaptics (SYNA), popped in value thanks to unexpected good news. In the case of Applied Optoelectronics, that news was in the form of an endorsement from Jim Cramer’s popular financial website, TheStreet.com, which included AAOI in a list of five stocks that were experiencing heavy insider buying. As I noted then regarding the $1 million stock purchase by a company director, “That’s a lot of money in anyone’s book, and not the type of transaction that a company director would make only out of loyalty, especially when it increases his stake in the company by more than 80%.”

Looks like we just found out what prompted that company insider’s big purchase; last week AAOI released its second quarter financial results, which included a small profit compared to a loss during the same quarter last year. That was good enough to exceed analysts’ expectations, driving up the share price of AAOI by nearly 25% last week. Now trading above $14, that puts AAOI’s share price above my buy limit of $12 so I’m switching Applied Optoelectronics to a ‘hold’ to see if it can sustain this level.

As for Synaptics, its good news last month was being selected as a vendor to provide fingerprint sensor technology for Alcatel smartphones, pushing its share price up modestly (about 3%) at the time. That makes last week’s share price jump of more than twice that amount somewhat puzzling, since the company released its quarterly earnings report the previous week to a decidedly indifferent audience. After spiking nearly 10% in the days leading up the announcement, shares of SYNA fell by nearly the same amount the following day before leveling off.

It appears someone, probably a mutual fund or other institutional investor, is betting on Synaptics winning a big contract from Apple for the version of its iPhone 8 being released sometime next year. Synaptics is one of those rare publicly traded companies that is almost entirely owned by mutual funds and institutions, who tend to buy (and sell) stock of their portfolio holdings in relatively large quantities.

In this case, recent insider trading activity does not suggest the company’s management team shares that confidence. Over the past six months, all insider transactions executed by officers of the company were either an “automatic sale”, “disposition” or “option exercise”, decreasing their combined stake in the company by a whopping 75%. That’s a huge red flag, so I’m using this recent price strength to sell SYNA out of our Special Situations portfolio. If the company’s senior management team is bailing out of the stock, then so am I. Sell Synaptics.