By Nancy Zambell
Editor, Investment Digest and Dividend Digest
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10 Big-Name Stocks Insiders Are Selling Now
Insider Buying vs. Insider Selling
What it Means to Individual Investors
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In my MoneyShow presentations, I’m often asked about insider trading. Most of us remember the high-profile scandals, such as Ivan Boesky in the 1980s and Martha Stewart in the early 2000s, who reportedly sold stocks they knew were heading downward-before the information was made public, cementing their gains and leaving individual investors holding the bag when shares fell.
But headlines notwithstanding, the truth is that most insider trading-buying and selling shares by company bigwigs-is legitimate. Company insiders buy and sell for a variety of reasons. And many of our contributors in the Investment Digest and Dividend Digest often note insider purchases and sales when they recommend a stock to our readers.
For example, in a recent Dividend Digest, Whitecap Resources (WCP.TO), recommended by Market Insider Bulletin, reported that insiders have been increasing their holdings for the past three years, especially during a recent share selloff.
And in last month’s Investment Digest, The Bowser Report recommended Royal Bancshares of Pennsylvania (RBPAA), a small-cap stock whose insiders have purchased 597,083 shares in the open market-just since July-and now own 10.6 million shares, or 43% of the company.
Theoretically, a company insider might be considered anyone who knows material financial information about a company before it is publicized. But the SEC’s official definition of a company insider is an officer or director of a public company or an individual or entity owning 10% or more of any class of a company’s shares.
The SEC-in a constant battle to keep corporate insiders on the straight and narrow-requires that insiders regularly report when they buy and sell company shares. The document used is called Form 4, and any changes in ownership have to be reported to the SEC within two days of the transaction. There are scads of websites that gather this information-often for free-and post it for our consumption.
In the past few years, the business of watching insider buying and selling has given rise to a whole industry of companies that do nothing but that. Newsletters, websites and intricate trading models have emerged to advise investors on which stocks the insiders are buying and selling.
The reason: People believe that insider trading activity often indicates the direction of a company’s stock price. After all, who could possibly be better informed on the intimate details of a company’s fortune? Here are a few of my favorite sites for finding out the latest insider trades:
http://finance.yahoo.com
http://reuters.com
www.insider-monitor.com
www.insidertrade.net
Or you can go to the SEC website: http://www.sec.gov, type in your company symbol, and you’ll immediately see all of its latest financial reports.
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What does it Mean to Individual Investors?
When I analyze companies, I feel better about a company whose insiders express confidence in their products by owning a portion of the company’s stock. If they put their own money at risk, especially if they are buying at full market prices, rather than at discounted option-associated prices, it gives me an indication that they are optimistic about their company’s future. And if there is a sudden flurry of buying, especially large-volume purchases, it draws my attention for further investigation, as it’s generally a good indicator of coming good news.
Insider selling can be a little trickier.
If a horde of insiders are dumping their company’s stock, that can often mean it’s time to head for the exits, as the selling activity might portend an adverse event that may negatively affect the stock. Of course, these insiders are not supposed to be selling ahead of such an event, but try as it might, the SEC can’t track them all, and some folks just think they can get away with it.
However, as I said earlier, there are lots of other, legitimate, reasons for insiders to sell their shares, including:
1. Need the money for large purchases
2. Rebalancing their portfolios
3. The exercising of options received in their compensation packages
4. Release of “lockup” restrictions after an IPO
5. The insider may be on his way out of the company
Consequently, it is important to attempt to find out exactly why insiders may be selling their stock. It could be important, or may mean nothing.
But when I see millions of shares being sold by several different insiders, I take note.
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In my recent research, I’ve found a number of widely held companies in which insiders have been unloading significant numbers of shares over the past 12 months:
Royal Caribbean Cruises (RCL) 14,663,552 shares
Microsoft (MSFT) 81,176,037 shares
Iconix Brand Group (ICON) 1,444,239 shares
Charles Schwab (SCHW) 9,428,872 shares
Google (GOOG) 3,046,858 shares
SalesForce (CRM) 3,277,075 shares
Reynolds American (RAI) 3,959,647 shares
Delta Air Lines (DAL) 2,129,427 shares Activision Blizzard (ATVI) 48,090,345 shares
Best Buy (BBY) 6,691,357 shares
Again, these sales may not be omens of any negative news, but if I were a shareholder of a company with many millions of shares being dumped, I would definitely take a second look, try to find out the reason for the sale and then decide if it’s time for me to bail, too.
Sincerely,
Nancy Zambell
Editor of Investment Digest and Dividend Digest
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