What Insiders Really Think About the Bear Market

As the market has plummeted, you've heard plenty of executives telling you that everything's going to be OK. But if corporate insiders aren't putting their money where their mouths are, why should you believe them?

Company executives and other insiders are required to report when they buy or sell shares of their company's stock. Looking at patterns of insider activity gives you valuable objective information about what the people closest to a company's operations think about its potential success. Also, when you hear executives make positive comments about a stock, looking at their trading lets you judge their credibility.

Overall optimism
In general, corporate insiders have been relatively positive on the prospects for their stocks. Statistics from Argus Research show that although insiders are still selling more stocks than they're buying, the ratio of sales to purchases has been significantly lower than normal throughout the market's decline over the past year.

Looking at some specific companies, you can definitely see that optimism from insiders. At Chesapeake Energy (NYSE: CHK  ) , for instance, Chairman and CEO Aubrey McClendon has been a one-man purchasing machine, with dozens of purchases totaling more than 3.3 million shares in just the past six months alone. Those purchases have been extremely profitable for McClendon, as shares have skyrocketed this year in response to higher natural gas prices and the success of new finds like the Haynesville shale play.

On the other hand, insider buying isn't a perfect indicator. Several insiders at IndyMac Bancorp, for example, bought shares last year and this year, as the stock fell from around $30 all the way to just pennies per share. Those who relied solely on those insiders to justify their stock purchases lost everything as a result.

Specific pessimism
Although overall insider sentiment may be relatively complacent despite the bear market, some corporate executives don't see things as positively. Here are a few of the many stocks with heavy selling volume over the past six months:

Stock

Insider Sales

Number of Shares Sold

Net Value of Shares Sold

1-Year Stock Price Change

Nike (NYSE: NKE  )

21

8.3 million

$549 million

(0.8%)

Apple (Nasdaq: AAPL  )

7

723,940

$201 million

24.4%

Google (Nasdaq: GOOG  )

85

322,616

$159 million

(3.5%)

Amazon.com (Nasdaq: AMZN  )

24

4.2 million

$318 million

(2.6%)

Gap (NYSE: GPS  )

32

8.9 million

$227 million

(12.3%)

Hess (NYSE: HES  )

63

3.0 million

$255 million

54.5%

Source: Yahoo! Finance, Capital IQ.

You might expect that all these shares would have fallen after such heavy sales. But looking at the actual share performance, it's tough to see any real pattern. Some of these stocks are up, while others are down.

Insider sales don't give investors as strong a perspective on a company's prospects as insider purchases do. That's because there are many different reasons why insiders sell company stock. With pay packages typically including stock options or restricted stock, executives can't get paid their full compensation without selling shares.

Seeing insiders sell off some of their holdings after their stocks have had a nice run is understandable. But when things aren't going as well for a company, it's really troubling to see insiders seem to join the stampede at a critical time for their business. When executives rush to cash in even when share prices have fallen dramatically, it's tough for you to have any confidence that things will get better anytime soon -- no matter what they may say in news conferences or press releases.

Executives on your side
Owning shares of companies with insider buying makes a lot of sense. When executives and other corporate insiders hold onto significant positions in their companies, you know that they believe in their businesses and share your interest in seeing share prices rise over time. That insider confidence makes it much easier to feel good about holding onto your shares, even when the market's pulling everything down. Often, that's what gives you the patience to hang on and eventually turn paper losses into profits.

For more from corporate executives, read about:

Gap, Amazon.com, and Apple are Motley Fool Stock Advisor recommendations. Let Fool co-founders David and Tom Gardner show you their top stock picks absolutely free with a 30-day trial.

Fool contributor Dan Caplinger has never been a corporate insider. He doesn't own shares of the companies mentioned in this article. Gap and Chesapeake Energy are Inside Value picks. Google is a Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy gives you insight into our thinking.


Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 687174, ~/Articles/ArticleHandler.aspx, 10/25/2014 8:55:52 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement