“Insider” shares sales shouldn’t automatically be interpreted as bad news for a particular stock.
If other “insiders” at the company, for example, end up snatching up the shares, the change-of-hands could be viewed as a sign the company is doing well.
And even if that isn’t the case, there are plenty of perfectly sound reasons for insiders to cash out—portfolio diversification, an offspring’s tuition bill or other expense, maybe taxes.
Of course, it may also be that insiders see treacherous waters ahead, and want to lock in profits.
TrimTabs Investment Research has been compiling information in SEC Form 4 filings, which document insider trades. The firm says that the dollar amount of monthly insider sales has been unusually high during 2019, with the number of months where insider sales topped $10 billion in the first nine months of this year, the highest since 2006. And if just one more month in 2019 sees more than $10 billion in insider sales, it would be a high not seen since at least 2004.
TrimTabs focuses on a metric of how many times insiders sold at least $10 billion worth of shares in a single month. “It signals a definite lack of confidence if insiders are not willing to hold onto their own shares,” Winston Chua, media relations representative for TrimTabs, says. “It says something about corporate confidence. Also external things like the trade war, Brexit, and other things that can pull down the economy.”
During seven periods this year, says Chua, insider sales topped $10 billion in a month. The last time that happened was in 2006. TrimTabs began compiling this data back in 2004.
Two caveats: The dollar activity may be more concentrated among fewer insiders than in the past. Also, the activity looks to be largely concentrated in a few industries.
Big money inside sales
For perspective, the markets were much different in 2006; the global financial crash was still a couple of years away at that point. “The stock market has gotten a lot bigger since that time, so maybe $10 billion now is not the same as $10 billion back then,” Chua says. Back in 2006, the average insider sales volume across those seven months was about $18 billion. “Right now, it’s not anywhere close to that,” he says, although he would not provide the current average.
Sales often happen through 10b5-1 plans, in which an insider holder of shares will plan in advance when to buy and sell to avoid claims of insider trading. There are also recent IPOs in which insiders frequently sell large portions of their stocks.
Triangulating results
But there are other ways of interpreting the data. Jasper Hellweg, an associate analyst for growth pharmaceutical, medical technology, and financial technology at Argus Research, and an insider trading analyst for Vickers Stock Research, looked at weekly average activity in terms of the number of trades in which insiders bought or sold shares. He also calculated from Form 4 filings with the SEC. The data included single or multiple trades of 500 shares or a transaction value of at least $1,000. (He excluded stock dividends, gifts, private transactions of less than 10,000 shares not through an open exchange, and exercised options or share grants from bonus plans).
Hellweg says that the number of times insiders sold shares per week in 2019 has been “well below average” compared to previous years. Additionally, there was a “good amount of buying activity,” meaning transactions where insiders purchased shares.
Comparing the data from Argus and TrimTabs is difficult because they define their metrics differently. TrimTabs is adding the dollar values of the transactions. Argus is counting the volume of transactions, whether buying or selling, take place.
Argus could see a relatively low number of sales transactions, but there isn’t an upward limit on how large those transactions can be. Similarly, TrimTabs can see a high dollar value of insider sales, but there is no reason why the totals couldn’t be split over a smaller number of shares.
Both metrics can be useful. If there are many more sales than purchase transactions, that could indicate a lack of faith in the future of the companies in question. If there are many more purchase transactions than sales, it could be positive.
At the same time, dollar volume does matter. The purchase or sale of a large volume by a relatively low number of insiders might have more significance because they are undertaken by those with the most to gain or lose.
Looking at both sales and purchases is also important. Even if the number of sales transactions is large, if the volume of purchases is larger, you could just as easily argue that the result shows higher net confidence levels.
In other words, it makes sense for investors to pay attention to the details of data to better understand how markets are working. For example, the insider selling that TrimTabs noticed wasn’t evenly spread across all industries. Some of the industries where insiders led in share sales were high tech, consumer discretionary, and energy.
Regarding the somewhat incongruous analyses of the two firms, there is one potential explanation: that a smaller number of insiders all sold large amounts of stock. “There are people taking out absolutely humongous dollar values of stocks regularly for various reasons, so that is possible,” Hellweg says. “Mark Zuckerberg takes out money constantly for his foundation.” So does Bill Gates. “Also, Jeff Bezos wants to fund Blue Origin,” the space travel startup he founded, Hellweg says.
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