When Selling is Noteworthy
Just as automatic, timed purchases by insiders are of little value in forecasting stock price direction, the same is true for automatic planned sales. Insiders frequently set up these sales to occur on a specific day of the month, quarter or year, and they are labeled as such in the public records.
Although one individual insider selling shares often has no relation to the direction of future stock price, when a large group of corporate insiders begins to sell (especially within one to two months of an earnings report), that often is significant.
Most insiders are well aware of the current valuation of their stock by historical standards. Therefore, large sales by multiple insiders should be seen as a red flag.
From time to time you might be long on a stock that begins to see strong insider sales. Should you simply dump all your shares?
While that might not be necessary, a prudent investor could minimize risk by tightening their stops, or perhaps purchasing some inexpensive six-week put options as a hedge. This strategy is especially beneficial when the stock has had an extended run-up in price.
Finally, when corporate insiders throughout the whole stock market begin to sell heavily, that also is a time to consider adjusting one’s portfolio. A company called Argus Research (through Vickers Stock Research Corp.) calculates the ratio of insider shares sold to bought on a regular basis. Recently the ratio was at 5.77-to-1. Among insiders at NYSE companies, the ratio was a whopping 8.2-to-1!
Contrast this to the end of November 2011, when the stock market bottomed. That week the insider sell-to-buy ratio was a scant 0.81-to-1. The last time the insider sell-to-buy ratio was similar to current levels was in July 2011 — shortly before the S&P 500 fell from 1,350 to 1,125.
This would seem to indicate that after three months of strong price ascension, corporate insiders are becoming anxious about the lofty valuations of their own stock.
As investors we can look for — and profit by — significant levels of insider trading in a company. Looking back at our questions, we’ve determined the following:
- Insider buying activity generally is more significant than insider selling, unless the selling volume is large and spread out among a number of insiders within a short period of time.
- Planned sales or automatic purchases have minimal value in forecasting price direction.
- When sell-to-buy ratios among all company insiders are historically large, that is a bearish indicator, and when the ratios are low, that often signifies a good opportunity for investors to enter the market.
Keep all these factors in mind, and insider trading figures will become a useful tool in shaping your portfolio.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.