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Insider Selling Hits New High

Posted: Sep 02, 2009 11:16 AM by Eric Fox

Tickers in this Article: STEC, BEN, PCLN, HPQ

The degree of insider selling has reached epic historical proportions, suggesting that these supposedly "smart money" investors believe a top is near for stocks. Like all such data, this market cue should be approached skeptically.

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The latest report shows that in August 2009, the amount of insider selling hit $6.1 billion, and the ratio of insider selling to insider buying is now at 30.6. This is the highest ratio since 2004. Many investors look at the pace of insider selling as a clue to short-term tops in individual stocks and the market.

While this is an imperfect measure and should be used in the context of other indicators, there is some validity to the theory that top executives and board members know more about the company than you and I do.

Insider Selling Examples
Priceline.com (Nasdaq:PCLN) has seen its stock price triple in the last year, and this former darling of the internet bubble has seen much insider selling recently. In August 2009, two company executives and a director sold stock.

Hewlett Packard (NYSE:HPQ) has also seen a great amount of insider selling in August 2009, with at least six executives selling stock. This includes Mark Hurd, the CEO of Hewlett Packard.

STEC, Inc. (Nasdaq:STEC) has been on a meteoric rise since its 52-week low of $3.42, and closed at $39.90 on August 28, 2009. The two top executives at the company have used the opportunity to sell 9 million shares.

The Chairman of the Board of Directors of Franklin Resources (NYSE:BEN) sold 200,000 shares of this asset manager in August 2009. This is an interesting one as a look at historical data shows that except for option exercise, not one insider has bought stock since March 2005.

What Does It Really Mean?
There are some problems with utilizing this strategy to invest. Some insiders participate in regular sale programs where they sell a specific amount of shares every quarter once the selling window around earnings reporting opens. Therefore the selling doesn't really indicate anything.

There are also plausible reasons for insiders to sell that are related to everyday life, as insiders get divorced or have to pay tuition. Although the media tends to demonize insiders, insiders are people too. For these two reasons, many investors look only at insider buys as a true indicator of what management thinks of future prospects for the company.

The Bottom Line
It's a fact that insider selling has been escalating as the market moves higher off its March 2009 lows. Whether this means anything is a different matter entirely and investors should think long and hard before selling for this reason alone. (For more on the topic of insider selling, take a look at Can Insiders Help You Make Better Trades?)

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By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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