The recent sword rattling in the financial media about insider trading of stocks among executives of large tech companies seem to be much ado about nothing.
When stocks are doing well, everyone is happy … but the minute a normal correction begins, the great hunt for the scapegoat du jour begins.
Insider Trading at AMZN and FB — Not Important This Time Around
Two potential scapegoats highlighted last week in a CNBC.com article, “Tech Insiders Dumped Shares Ahead of Slide,” were Cheryl Sandberg, chief operating officer of Facebook (FB), and Jeff Bezos, CEO of Amazon (AMZN). The article stated:
“The selling has stirred unease among some investors, who see the sales as opportunistic moves revealing a lack of confidence in their companies’ stock prices as shares in the fastest-growing internet companies soared in 2013.”
Bezos was called to task for selling $351 million worth of AMZN stock in February, raising his total insider sales to over $1 billion within six months. The article admits that while Amazon shares had fallen 11% since the sales (as of the April 14 posting date), Mr. Bezos’ latest sale was also 14% below the peak price the AMZN shares hit in January.
The article does mention that many of these sales are “automatic.” An automatic sale is one that is preset to occur many months in advance, with absolutely no way to know what the stock price will be when the sale is triggered. What it doesn’t go out of its way to point out is that the insider selling at Amazon.com was automatic.
It’s not as if Bezos awoke one morning with trepidation about his company’s prospects and told his broker, “Get me out of everything now before we collapse!”
Unclear messages like these can mislead investors into thinking that Bezos had some advance knowledge of the exact moment when AMZN stock and the Nasdaq were going to correct, and dumped his shares just in the nick of time. Of course, were that the case, the insider selling would have been direct, non-automatic sales around the third week of January, when AMZN stock reached $407.
We get this kind of posing around insider trading all the time, and often they’re just shameful and transparent attempts at class warfare, pitting the poor schnook investor, once again lulled into the market’s peak, against the greedy 1% insiders who conspire to sell overvalued shares to them.
For instance, note also that while the dollar amounts were substantial thanks to the lofty price of AMZN stock, the number of shares sold by company officials other than Bezos was not excessive. Amazon had simply more than doubled in the previous two years.
Should we mandate that company insiders can never take any profits for themselves?
Where CNBC.com gets it right is in its mention of Cheryl Sandberg’s sale of more than 50% of her company stock since the Facebook IPO — the author points out that she began selling when the stock was at $21.08, well below the current FB price near $60, and that the sales were made under a pre-arranged plan.
When Is Insider Trading Important?
So how does the average investor know whether insider trading is likely to portend a big change in a stock’s price?
As I have previously mentioned, when I look for insider sales that are more likely to be significant, I am looking for at least several of the following:
- Significant selling done without major announcements or fanfare.
- A large number of corporate insiders all selling within a short period of time.
- The sales are made on the open market.
- The number of shares sold and subsequent dollar amounts realized are quite large.
- The insider(s) has a previous history of selling near the peak of the stock’s price.
- Selling occurs after a large decline in the share price of the stock. This may indicate that insiders have little faith that their stock is going to rebound.
- The sales are not the pre-arranged, automatic type
Although there was insider trading at AMZN by several officers within a short period of time, and although they occurred after a price peak, they were the automatic type and were not made after a large decline in stock price. Additionally, other than Bezos’ sale, the number of shares sold was not excessive. So while the sales may appear to have been significant, I believe the timing was coincidental to the stock price decline over the last three weeks.
In fact, in the month following the insider sales, Amazon’s stock price first climbed more than $30 to $380, before falling to current prices around $330.
Don’t let media hype about insider trading scare you. Always research your stocks well before making buy or sell decisions, and weigh all insider selling and buying carefully before deciding to purchase or unload any shares.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.