Since the beginning of the year the stock market has been practically unstoppable. The Dow Jones and S&P 500 are both at multi-year highs, while the Nasdaq Composite has ascended to levels not seen in more than a decade.
But with any rally comes the inherent skepticism (at least on my end) of what may cause it to end. Most of the time the warning signs that a rally may be ready to fizzle out are tough to see. This time, however, I think the warning sign might as well have a neon sign reading, "Look right here!" attached to it.
This trend I'm alluding to is a marked increase in insider selling. In February, according to data from Thomson Reuters, $44.77 worth of stock was sold for every $1 purchased. That's the highest level of insider selling in a year.
But that's not all. As Investors Intelligence has reported, because most insiders receive stock as a form of compensation, it's quite normal for them to sell two shares for every one purchased outright. Lately this selling has been trucking along at a rate of eight-to-one.
If you don't subscribe to the opinions of these pundits, then all you have to do is look at the sea of secondary offerings that came out of the woodwork this month. These kinds of secondary offerings don't add to a company's share count or put money in its pockets, but they're a clear indication that major shareholders want to lighten their position or get out completely.
Here are five notable secondary filings from March:
Shares Being Sold
|Dunkin' Brands (Nasdaq: DNKN )||22 million|
|Aircastle (NYSE: AYR )||5 million|
|FleetCor Technologies (NYSE: FLT )||6 million|
|Equity One (NYSE: EQY )||4.06 million|
|Nielsen Holdings (NYSE: NLSN )||25 million|
Source: Individual company press releases.
I'm acutely aware that in each of these cases, it's private shareholders, rather than the companies themselves, that are doing the selling. Still, this is not a pattern you should ignore.
Dunkin' Brands' 22 million-share offering might seem large, but considering that the company began trading publicly less than eight months ago, I'm going to give it the benefit of the doubt.
It's FleetCor and Aircastle that have me concerned. FleetCor is also a relatively new issue that began trading publicly in December 2010, but its stock price is currently at all-time highs, while, according to Yahoo! Finance, analysts are expecting its sales growth rate to get cut in half from 2012 into 2013. The selling in Aircastle could be worrisome, as fuel prices are on the rise, and the company makes its money leasing and selling jets. Insider selling could be the precursor of a slowdown in its business despite its low P/E ratio.
For Equity One, much like FleetCor, revenue growth is slowing, and a yield under 5% doesn't seem all that attractive compared to the yields of other real estate investment trusts. Nielsen, the research firm that looks into what people buy and watch, is trading at 125 times trailing-12-month earnings and bears $6.8 billion in debt, so worries do exist with its valuation.
Shortly after insider selling peaked in 2011, we saw the stock market indexes hit their highs for the year. Might 2012 offer the same forecast? I'm inclined to think so, even though March's insider sales have been trending somewhat lower -- although anything could happen before the month is out.
Is insider selling bad news for the rally? Share your thoughts in the comments section below with your fellow Fools.
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