At an investment conference a few years ago, an attendee told me he was shocked by the level of insider selling in some of his stocks.
Should he sell? Not necessarily.
There are plenty of reasons that officers or directors might sell that have nothing to do with the outlook for their business.
For example, insiders might sell to diversify their portfolios.
Bill Gates has been a regular seller of Microsoft (Nasdaq: MSFT) for decades.
Is it because he doesn’t like the outlook for the company he founded?
Hardly. The overwhelming majority of his net worth is tied up in the stock.
But even Bill Gates has an overhead. He must sell shares from time to time to pay his bills and fund his activities.
Or… insiders might sell to meet specific financial needs, like paying for a second home or Ivy League tuition for their kids.
Or maybe they’re getting a divorce and have to sell their shares.
There are lots of reasons an insider might sell that have absolutely nothing to do with the near-term prospects of the business.
On the other hand, there are good reasons an insider would sell that have everything to do with the company’s near-term prospects.
The insiders at Enron, for example, sold $1.1 billion worth of the stock in the 12 months before the company filed bankruptcy.
Insider selling is tricky. Sometimes it’s a negative signal. Other times it’s not.
But turn the equation around. Why would insiders buy significant amounts of their own companies’ stock with their own money at current market prices?
There is only one logical answer.
Given all they know about the company, its employees, suppliers, customers and competitors – including plenty of material, nonpublic information – they feel the shares are selling far below their intrinsic worth.
And that’s a signal worth noting.
I’ve been tracking insider buying for nearly 40 years now.
In early 2020, for example, I recommended At Home Group in one of my VIP Trading Services. It’s an operator of home décor superstores.
I told readers that the company had missed sales and earnings estimates over the last few quarters.
That explained why the stock had collapsed from more than $40 to about $6.
With most of its sales coming from brick-and-mortar operations, it looked like a classic victim of the so-called “retail apocalypse.”
Especially with the pandemic growing and store closures on the way.
However, I noted that insider Clifford Sosin – who owned more than 10% of the outstanding shares – had recently purchased another 470,000 shares.
Insiders aren’t prone to throwing their money down a rathole.
And Sosin’s track record showed that he had been particularly astute with his previous insider purchases.
Sure enough, the stock bounced back.
And in early 2021, At Home agreed to sell itself to private equity firm Hellman & Friedman for $2.8 billion – all cash – or approximately $36 a share.
Does insider buying always pan out this way? Of course not. No market signal is infallible.
But insiders do have a massive, unfair advantage.
That’s why the federal government requires them to file a Form 4 with the Securities and Exchange Commission every time they buy or sell their own companies’ shares.
Insider buying is one of the most compelling signals you can get.
When you see officers and directors piling into their own companies’ shares, you can safely ignore what the analysts are saying.
After all, analysts are covering dozens of stocks. Insiders are actually running that one company.
Analysts don’t have access to material, nonpublic information. Insiders do.
More to the point, analysts are putting out opinions. Insiders are risking their own money.
Who do you really want to listen to?