Insider Selling Could Mean Anything, Whereas Buying Can Only Mean One Thing

At Peridot Capital, I tend to ignore insider selling completely. Sure, a lot of sales inside a company can indicate management feels their stock is overpriced, but there are dozens of other reasons top brass sell stock, and they are never required to give the reason for their actions. Investors should be able to tell if a stock is grossly expensive or not on their own, if they indeed manage their own money, so insider selling data really can’t be relied upon.

Insider buying, however, I believe is crucially important. While I can make a laundry list of reasons why someone chooses to sell a stock, the reasons to buy are much fewer in number. In fact, there’s only one (to make money). It’s not surprising that studies have shown much more meaningful correlation to stock performance and insider buying, as opposed to insider selling. And with that, I’ll leave you with the following Associated Press story that ran on Friday evening. To those who think there are bargains among the wreckage of the latest correction, you’re not the only ones…

AP: Insider Buying Set Records in August

Friday September 7, 6:17 pm ET

NEW YORK (AP) — Insiders purchased shares of their companies’ stock at a record pace in August, analysts said, as credit market deterioration threw stocks into a tailspin during the month. The trend of buying among insiders, who are typically long-term investors, was one of the few bullish signals last month, said, a Web site that tracks insider transactions.Company Insiders Bought Stock at Record Pace in August As Credit Market Woes Stunned Market

According to Thomson Financial, insiders drove buying volumes to their highest monthly levels since 1990, with $465.5 million in purchases.

Insiders in the energy, retail and insurance industries led the buying spree, said analysts in a research report released Wednesday.

In the energy sector, insider buying was at its strongest since the spring of 2005, boosted by large purchases by RPC Inc. Chairman Randall Rollins, Cheniere Energy Partners LP Chief Executive Charif Souki and insiders at other companies. Schlumberger Ltd. Director Michael Marks and Nustar GP Holdings LLC Director William E. Greehey also bought shares as their companies’ stock came down from 52-week highs.

In the retail sector, which was hurt as economic uncertainty slowed shopping this summer, top executives at several companies bought stock as shares fell to 52-week lows in August. American Eagle Outfitters Inc. Chairman Jay Schottenstein and other insiders bought 184,575 shares. Barnes & Noble Inc. Chairman Leonard Riggio bought 100,000 shares, his first purchase in two years. The CEO of Best Buy Co.’s international operations bought 11,300 shares, the largest insider purchase of the electronics retailer’s stock in more than two years.

In the insurance sector, more than 10 insiders bought shares at Conseco Inc. after the company’s stock plunged in August. Also, Prudential Financial Inc. Chief Financial Officer Richard J. Carbone bought 10,000 shares last month. Unitrin Inc. and American Financial Group Inc. were among other insurance providers that reported large insider purchases in August.

In other sectors, Yahoo Inc. President Susan Decker and Director Arthur Kern bought more than 65,000 shares of the Internet search company, which has slipped against rival Google Inc.

Also, three directors of American Express Co. bought 63,000 shares of the credit card company in August.

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5 Thoughts on “Insider Selling Could Mean Anything, Whereas Buying Can Only Mean One Thing

  1. Anonymous on September 8, 2007 at 9:12 PM said:

    Chad, I can think of other “reasons to file an insider buy transaction.”

    1. Signal that “everything’s OK” during a time of low confidence, even if you have no idea about the future. If the insiders are so smart, why were they at a 12-year low in insider buys in February 2005? (link follows)

    2. Taking delivery of option-related shares instead of selling them. I believe there’s a tax advantage to taking delivery.

    3. These insider buys need to be analyzed on a person-by-person and stock-by-stock basis over time, to look at the *net* flow and whether they’ve demonstrated alpha in their insider buys in the past. Academic studies have confirmed insider alpha, but only for their own stocks….

    4…. and unless I’m misreading the market horribly, it’s *overall* economic and business confidence that’s the concern. So the situation is different than seeing Bausch & Lomb insiders make big buys right after the contact lens solution recall occurred, tanking the stock. That was *stock-specific* and they likely would have superior information. The problems in this market are spread across multiple asset classes, let alone multiple stocks.

    5. Finally, for many of these insiders, tossing ten grand or more at a stock whose board they sit on is not a major part of their portfolios. The signaling effect (#1) may be a stronger effect.

  2. >>for many of these insiders, tossing ten grand or more at a stock whose board they sit on is not a major part of their portfolios. The signaling effect (#1) may be a stronger effect.< < Yes, exactly. Perhaps they already own a huge amount of stock and are hoping that a small public buy will raise the value of their much-larger existing holdings. Or perhaps their compensation is tied into the stock price, and are hoping that the publicizing of a small investment will create a much larger personal payoff.

  3. Chad Brand on September 9, 2007 at 7:13 AM said:

    A few counter points…

    *FYI: Insider buys are direct purchases, not acquisitions due to exercising of existing options.

    *I agree that some buys are more significant than others. So, if someone is buying a lot of shares instead of a little, and they have a good track record with prior purchases, that would be more meaningful than vice versa. Totally agree with that point. Still though, people are buying to make money. That doesn’t mean they always will, but that is the intent.

    *There is no doubt that sometimes insiders make “symbolic purchases” in the form of a few thousand shares, not because they think they’re going to make a killing, but because they can easily afford it and they think it will have influence in the market. However, I would point out two things.

    One, most of these people are smart and realize that it won’t boost the stock for more than a day or two, if at all. I think that is why you don’t see this type of buying all that often, relative to how many times there are confidence crises at particular companies.

    Secondly, and more importantly, if we were just seeing small symbolic purchases, it would not have made a headline. Small purchases don’t add up to the biggest monthly purchasing activity in 17 years (which happened to be the last recession by the way), which is why the story was newsworthy. Due to the magnitude of the buys, I think it’s safe to assume most of these trades are more than symbolic. Of course, time will tell if they were wise or not.

  4. Jeff White on September 15, 2007 at 8:40 AM said:

    I tend to agree, but I still can’t place trades based on insider buying because the insiders’ timing can be so poor.

    I also wrote about this very topic last month:
    Insider Activity

  5. Anonymous on September 29, 2007 at 6:46 PM said:

    Insider buy sell ratios were at a record level last month, followed by the 0.5 rate cut. Wonder if this is coincident…

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