Scary new reports are revealing a high ratio of insider selling, which should make investors concerned. However, there are a number of reasons for insider selling, and they don't always mean the company is in trouble.
The financial media is full of scary new reports indicating investors should cut back on stocks or flee the market altogether. The reason? SEC data show a high ratio of insider selling.
I’ve been following insider activity in the stock market for decades, and while officers and directors are the epitome of “smart money,” the mainstream media — as usual — is painting an incomplete picture.
Let’s start with the facts. In recent weeks, insider selling has outnumbered insider buying by a ratio of almost 10-to-1. That’s the most bearish reading in almost 15 years.
Moreover, insiders are generally worth paying attention to. Not only do they know more than we do about their employees, customers, suppliers and competitors, but they have access to all sorts of material, non-public information like the direction of sales since the last quarterly report, the gain or loss of major customers, the pending settlement of litigation, new products and services in development, and so on. That can’t help but give them an unfair advantage when they transact in their own stock. It’s also why the SEC requires them to file a Form 4 (electronically and within two business days) detailing how many shares they bought or sold, on what date and at what price.
Sometimes when the insiders are bailing out en masse, it is indeed a negative commentary on the prospects of a business. Other times it is because they are diversifying their portfolios, paying for an expensive private school or maybe even getting a divorce. Bill Gates has been a regular seller of Microsoft for more than 20 years. Not because he doesn’t like the company but because he has almost his entire net worth tied up in it.
However, a fuller understanding reveals the recent ratio of insider selling is nothing to get alarmed about. A high percentage of sales in recent weeks were the result of just a few insiders selling a huge number of shares.
• John Schreiber, a director of General Growth Properties (NYSE: GGP), sold 18 million shares worth $356.4 million, during the first week of March, for example.
• Officers and directors of FleetCor Technologies (NYSE: FLT) sold $400 million worth of shares.
• Directors of Charter Communications (Nasdaq: CHTR) sold more than $550 million worth.
If I were a shareholder of these companies, I would take a closer look and check things out. But the sheer size of these sales skews insider data and says nothing about how the vast majority of insiders feel about the market.
Of course, insiders don’t know any more about the future of the economy or the entire stock market than you or I do. They are experts on their own companies’ prospects, not the direction of the whole S&P 500.
If you see insiders bailing out of their own stock, it’s at least a reason for concern and perhaps a reason to lighten up on your own shares. But as I mentioned, there are legitimate reasons for insiders to sell their shares that have nothing to do with the outlook of the company.
The time to really pay close attention, however, is when you see insiders piling into their own companies’ shares with their own money at current market prices. As buy signals go, it doesn’t get much better than that.
Dozens of academic studies have confirmed that companies under heavy accumulation by the officers and directors who oversee them tend to outperform the market averages by a wide margin.
So if you’re looking to put fresh money to work, a good place to start would be companies experiencing significant insider buying. That’s the kind of news worth listening to…