Recently there have been a number of articles discussing the high amount of insider selling going on in the marketplace. During February and March of this year insiders were buying their stocks at a pretty good clip however since June of this year the trend has reversed itself. In August particularly, insiders sold about $31 worth of stock for every $1 they bought.
The first thought which comes to mind upon hearing this data, and perhaps the obvious conclusion is to think that insiders are not confident in the current stock prices of their companies and are getting out while the getting is good. Charles Biderman heads TrimTabs, an independent research firm which monitors market liquidity, and in an article on CNNMoney states his opinion that the issue is somewhat cut and dry. “Insiders know better than you and me. If prices are too high, they sell” says Biderman. InsiderScore, which focuses heavily on insider buying and selling trends, also took note of the recent activity by corporate insiders. Ben Silverman, director of research at InsiderScore.com noted that corporate officers and directors are selling the most they have since the summer of 2007. The pragmatic capitalist cites even more alarming statistics than those mentioned above saying that for the two week period ending September 14th, “insiders purchased just $4.6MM in stock while selling an astounding $471MM in stock.”
As usual, there is another side to this story however. Some of the selling may be facilitated by executives need for money. At TD Ameritrade for instance Joe Ricketts and his wife sold 5.7 million shares to help fund the purchase of the Chicago Cubs, and another executive’s options were just about to expire. These executives have expenses as well, and in some instances a fair portion of their compensation is tied up in stock options. Since they couldn’t really be major sellers in a down market (bad image and bad price) this reaction could simply be a way of releasing pent up demand.
Wall Street Pit also points out that there have been times when insider selling has been a fantastic indicator of the market and times when it has preceded the exact opposite movement of the market it is meant to foretell. The article provides examples of times when insiders have been early or late in their buying patterns and concludes that “insider buying and selling trends have been very volatile over the past decade. There have been plenty of times when insiders buying and selling is at the right time and at the worst possible time… The wave of insider selling and lack of insider buying may be a warning sign. It may simply be what it always has been: something to be aware of. Or it may be even more proof that the majority of company insiders are just like the majority of investors, really bad.”
Ultimately, it is hard to ignore the fact that selling is so high right now compared to buying. This factor by itself however should not be cause for alarm. There are many reasons why executives could be selling now and not buying. In addition to those listed above, perhaps the unavailability of financing is playing a part in their need for cash. These trends should simply be a warning sign, used to spur research into the issue. Integrity tracks over 15 firms in addition to InsiderScore and Trimtabs which pay attention to insider trading and could be of use in this regard.