Bloomberg.com published a very interesting article today reporting on a study by Washington Service showing that insiders of U.S. companies are taking steeps to lighten their exposure to their own company’s stock. Examples of this sort of behavior are clear from the founding family behind Gap, Inc (GPS), the CEO of NetApp, Inc (NTAP) and the founders of Bed Bath & Beyond (BBBY) have all made major sales recently. According to the study, insiders bought $42.5 million in shares through April 20 which would make it the lowest amount bought in a month since July 1992.
“While the Standard & Poor’s 500 Index climbed 26 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.
“They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling,” said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. “Whether it’s a sustainable rebound is still in question. I’d prefer they were buying.””
Insiders may have a more intimate knowledge of the inner workings of their companies; however, not everyone is convinced that this is the appropriate course of action.
“With corporate America stuck in its seventh straight quarter of earnings decreases, the longest in seven decades, executives may have become too cautious, said Penn Capital Management’s Eric Green.
Investors are looking to the final quarter of the year, when S&P 500 companies will increase operating income by 74 percent, according to analyst estimates compiled by Bloomberg. They forecast profits will fall 32 percent in the second quarter and 19 percent in the third.
“Things are a lot better than they were,” said Green, director of research at Penn Capital, which oversees $3 billion in Cherry Hill, New Jersey. Recent history also shows that “insiders have been wrong,” he said.”
Of course, tracking insider trading activity is an inexact science, but this type of behavior seems to suggest a distrust of the biggest rally since the 1930’s. If these executives believed that their stocks were headed higher in the near term, why not leave them alone for a richer pay day down the line? Of course, each case has specific circumstances that cannot be understood from the trades alone; such as a need to diversify or the need to make up for losses in other investments like real estate. However, when you see a trend like this develop among some generally very smart and uber-informed traders, it is certainly something to take notice of.