Insider Selling Has Reached a Fever Pitch of Late. Does It Mean the Sky is Falling?
We all love it when the market zooms higher. That momentum gives investors a chance to cash in some winners and, sometimes, even unload some disappointments at temporarily decent prices. But that trend also enables an important group of investors—the insiders of a company, its top officers and directors—to do the same.
And sometimes, insider selling is just that—taking some profits off the table. But not always.
There are lots of reasons that insiders sell their shares, and profit-taking is just one of them. Sometimes, those sales can signal critical information about a company—or the insider.
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Not All Insider Trading is Bad
We’ve all heard the stories of insider trading. That phrase was much in the news during the tech boom and bust of the early 2000s, and being a party to insider trading sent lots of people, including Michael Milken (the junk bond king at Drexel Burnham Lambert), Jeff Skilling (Enron), Steven Cohen (SAC Capital), R. Foster Winans (the Wall Street Journal), and even Martha Stewart, to jail.
And those actions gave insider trading a bad rap. But, realize, that type of trading was the illegal sort—acting on or imparting ‘inside,’ non-public information to buy and trade equities. The majority of insider buys and sells are perfectly legal, and often tell a story that investors need to hear.
Insider activity can:
- Identify trends—Are lots of insiders buying or selling? If an unusual amount of buying or selling is occurring, that may mean something important is about to happen at the company—good or bad. The important issues to discern here are two-fold: 1) Are the majority of insiders selling; and 2) how much stock do they have left after their sales?
- Expose patterns, some of which are business as usual. When I was a young securities analyst, I noticed, one summer, that Charles Schwab sold almost a million shares of his company’s stock. I was intrigued and set out to uncover the reason why. It all turned out to be a non-event, as I found that every year, about the same time, he exercised some of his options, and cashed in about the same amount of stock. This type of insider selling is usually nothing to be worried about.
Before the institution of the SEC’s 10b5-1 plan in 2000, insiders had one option for making trades—in the open market. But with the advent of this rule, it gave them one more method and also presented investors with one more tool to help in analyzing insider trades.
The rule prohibits any trade resulting from material non-public information, which is deemed illegal. The rule helped both investors and insiders, as it provides insiders the ability to create a trading plan in advance, setting specific prices and dates for the trades. Had this been in effect when I noticed Charles Schwab’s trading activity, I would have been able to see that his summer trades were routine and planned ahead of time.
The rule helps investors figure out if insider trades were unplanned or planned, and it also helps insiders to keep out of trouble should they have insider information at the time of the sale, because the trade was planned before that information was available.
Where to Find Insider Transactions
Institutional investors and insiders are required to file SEC Form 4. That form will also include any trading subject to 10b5-1 plans and is available at https://www.sec.gov/edgar.shtml. As well, there are many financial websites that publish insider trading activity, but one of my favorites is https://www.nasdaq.com/. Under the Insiders tab, you’ll find all the recent insider activity at the company, as well as the number of shares remaining after the sale.
But It’s Not the Whole Picture
But don’t forget, while this insider trading activity can be critical, alone, it does not tell the true picture of a company’s well-being. Analyzing insider trades without getting a clear picture of the company’s fundamental strength and weakness would be a mistake. It’s important for investors to note that one parameter is not enough to gauge a company’s overall health. It’s just one factor.
But it is a starting point. With that in mind, let’s look at some recent insider activity.
An Insider Selling Spree
This month, so far, corporate insiders have sold an average of $600 million of stock per day, according to TrimTabs Investment Research. TrimTabs reports that it looks like August insider selling will surpass $10 billion, making it the fifth month in 2019 to do so, and reflecting more insider selling than any other time since the market’s bull run began in 2009.
This statistic may or may not signal anything conclusive about the economy—despite much media talk about a recession. After all, the economy continues humming along with low unemployment, rising corporate earnings (the best indicator of a healthy stock market), and a strong housing sector.
But I thought it might be interesting to see who is doing all the selling.
Recent reports from OpenInsider noted that last week’s selling included top executives from Salesforce (CRM), Slack (WORK), Chipotle (CMG), Visa (V) and Home Depot (HD).
But since I always like to look at the market over a longer period of time, I did a bit more research and found a MarketBeat.com report that cited several other companies that have seen big insider sales in the past six months. The top five include: Procter & Gamble (PG), Intercontinental Exchange (ICE), Torchmark (TMK), Ecolab (ECL), and CME Group (CME).
And taking my research a step further, I searched for large insider selling on my stock screener and found that insider selling is fairly rampant right now. Here are some of the biggest trades I uncovered:
- Salesforce.com (CRM): Chairman & CEO Marc Benioff has been selling shares for at least the last nine months, in 5,000 or more increments. And another eight executives have been selling, too.
- Jeffrey Green, President & CEO of The Trade Desk (TTD), sold more than $100 million of his shares this month.
- John Schnatter, 10% owner of Papa John’s (PZZA), sold some $30 million of shares of his stock in the past week.
- Kirk Spencer, Director of Extra Space Storage (ER), sold almost $60 million in shares in the past couple of weeks.
- Michael Schall, President of Essex Property Trust (ESS), sold more than $11 million of stock last week.
This is by no means a comprehensive list, but if you own any of these stocks experiencing big insider selling, it would be a good idea to find out why it’s happening.
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