Insiders Are Selling These Stocks -- Should You Be Worried?

Insiders are buying and selling stock all the time. But it takes a closer look to differentiate between regularly planned sales for tax purposes -- and mass exoduses because business demand may be heading south.

Although it's just a small sample size of the recent trend, corporate insiders have been selling stock at a phenomenal rate of late. Recent data for the S&P 500 showed that there was 41 times more dollar volume of insider selling than purchases. In fact, only two companies showed insider buying in late June: Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) and Philip Morris International (NYSE: PM  ) . After such a monstrous market run-up since 2009, it pays to take notice of not just the insider sales themselves, but also the frequency and percentage of insider ownership being disposed.

Here are three companies where insiders sold shares in June that bear further research:

Company

Total Insider Sales (past 6 months)

Percentage of Insider Ownership Sold

NetApp (Nasdaq: NTAP  )

20

21.4%

AvalonBay Communities (NYSE: AVB  )

15

14.3%

MetroPCS Communications (NYSE: PCS  )

114

14.5%

Source: Yahoo! Finance.

NetApp is a mixed bag. Insider selling at the storage networking equipment provider didn't really begin taking off until June, and not surprisingly, that's also when the company was scheduled to announce its 2012 guidance. An initial look at the guidance the company issued Thursday looks bullish; EPS was on the high end of expectations, as was revenue. But there were also potential red flags, such as an expected decline in gross and operating margins from 65.6% and 20% down to 62.5% and 19%, respectively. While NetApp remains decisively profitable, these insider sells are a caution flag about its future growth, so don't overlook them.

AvalonBay could be wrongfully accused if you consider its long-term prospects. The company runs apartment communities in 10 U.S. states and is aggressively expanding as it looks to take advantage of what is expected to be a dramatic influx of renters in the coming years. Foreclosures and short sales are damaging the credit quality of countless people and turning them into potential renters. Based on AvalonBay's expected five-year growth rate of 12.7%, I'd consider the recent insider selling as something to not worry about yet. AvalonBay isn't cheap at 3.4 times book value and more than 12 times sales, but there hasn't been a more steady growth story in community living of late.

MetroPCS Communications, however, looks downright scary, and investors should be concerned. Within the past six months, insiders have sold a whopping 114 times without a single insider purchase. In its latest quarterly filing, the wireless communications provider that allows users to pay as they go without a contract did report decent numbers. Average revenue per user rose, while revenue and subscriber numbers appeared strong. Still, the company's profit of $0.15 fell $0.04 shy of expectations. While growth may be strong, the company's spending habits may be the real worry, with its debt-to-equity already at a mile-high 163% . Shareholders would be wise to dig a bit deeper on MetroPCS to find out if there's something more behind the insider exodus.

Sometimes insider selling isn't as cut-and-dry as it would appear. Digging deeper will often give you a better understanding of why insiders might be selling and it definitely is a more reliable solution than relying on your magic-8 ball.

Do shareholders of these companies have any reason for concern? Share your ideas in the comments section below and consider adding NetApp, AvalonBay Communities, and MetroPCS Communications to your watchlist to keep up on the latest with each stock's respective sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. The Motley Fool owns shares of Berkshire Hathaway and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that prides itself on transparency.


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