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Insider Selling: When Is It a Warning?

It doesn't always mean investors should head for the exits

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Few things are more anxiety-producing than hearing that company insiders of your favorite stock are about to sell off large numbers of shares. The stock may be cruising along, delivering images of that trip to Hawaii or 40-foot boat you’ve always wanted. Then suddenly, you hear an announcement like this:

“Google co-founders Larry Page and Sergey Brin plan to steadily sell off up to 10 million shares of stock over the next five years, according to an SEC filing.”

That announcement came out in January, 2010. However, over the past three years, GOOG has risen from about $550 to its current price of $717. A 30% gain in three years is decent, if not Earth-shattering. Other notable tech stocks, such as Apple (NASDAQ:AAPL) up 128% and even IBM (NYSE:IBM) up 50%, have outperformed Google during the same time frame.

While those sales may have stalled Google’s appreciation somewhat, had you sold your Google stock in January 2010 expecting it to crash, you would have missed that 30% rise.

It’s often said insider selling can be a tip-off that insiders know their stock is about to underperform the market. While that’s sometimes true, it’s also true that quite often insiders sell for personal financial reasons that have absolutely nothing to do with bad times ahead for their company.

So, when insiders at a large publicly traded company begin to sell off a large amount of stock, how do shareholders know if they should rush for the exits? Let’s take a look at the nuances that dictate whether inside sales are cause for alarm.

Don’t Panic

These days it’s also common for companies to pay smaller salaries to company insiders and compensate them instead with stock shares and options. Keep this in mind, because often an insider could be selling shares simply to raise some personal capital.

It’s also an axiom of the stock market that while insider selling is often insignificant because it can be done for any number of reasons, insider buying almost always indicates that the corporate officers have reason to believe better times are ahead. Therefore, insider buying is usually much more important than insider selling.

But how do we decipher the insignificant from the more significant insider selling? Here are several clues that the selling can probably be ignored:

  • Automatic sales are insignificant because they’re scheduled at intervals established far in advance and are simply done to generate income for the insider over time.
  • Option sales are insignificant because they’re governed by expiration dates.
  • If only one corporate insider is selling, it’s less likely to be significant because it may just mean that one person has a particular need for revenue at that time.
  • When a stock has run up quite a bit, an insider may feel it’s prudent to take some profits. In such cases, it’s even common to see the stock trade higher for awhile. Nobody, not even the CEO of a company, can predict the exact top or bottom of a stock advance with absolute certainty.
  • The selling is done slowly, over a long time frame, such as with Google.
  • The insider has no clear history of selling near price peaks

So, looking at the Google insider trades, the sales were scheduled far in advance, have to-date been performed over a dozen successive quarters and at a wide range of prices. In essence, during this three-year period, this selling has been the norm — rather than the exception — and is, therefore, not really notable.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC