Should You Follow Insiders Into or Out of These Stocks?

Insiders at Facebook and Clean Energy Fuels are selling shares. But insiders at Clean Energy, and even at J.C. Penney, are buying. But you don't necessarily need to follow. A little context goes a long way.

Feb 12, 2014 at 7:05PM

As an investor in a company, it can be hard to take a look at a Form 4, which shows insider buying and selling, and not wonder whether we should follow suit -- especially when shares are being dumped by a company founder, like Clean Energy Fuels (NASDAQ:CLNE) CEO Andrew Littlefair, or a top executive like Facebook's (NASDAQ:FB) Sheryl Sandberg, who's been an important part of the company since the early days. Meanwhile, J.C. Penney (NYSE:JCP) CEO Mike Ullman invested $1 million of his personal wealth in shares, and Littlefair actually ended 2013 having bought more shares than he sold. What do all these insiders know that you don't? Should you follow their moves?

Chances are that what they're doing bears no relation to your own investment decisions. Let's talk about why.

Compensation versus investing

Sheryl

Sandberg has sold millions of shares but still holds 12 million more. Source: Wikipedia

It's easy as an investor to see it as a mark against a company when important insiders sell shares. anyone selling one of our investments as a mark against a company. We naturally think, "They know something I don't know." Sheryl Sandberg has sold nearly 6 million shares of Facebook since 2012 -- that's $372 million worth at today's prices. Clean Energy's Littlefair sold 8,000 shares every single month for most of the past two years, netting more than $2 million in the process. 

Looking at insider transactions can add valuable information and insight, but looking at the selling with zero context -- or even worse, projecting our situation, and our reasons for holding, onto insiders -- doesn't add value to your process or move you closer to making better investing decisions. One of the main reasons why is that insiders often have a much different relationship with their shares than we do. After all, their holdings tend to be largely a product of compensation, not personal investment. They rarely buy those shares on the market; the shares are a form of currency, paid as part of their employment with the company. 

Many reasons to sell
The old saw "many reasons to sell, only one reason to buy" is partly true. Investors in Facebook, for example, buy shares because of the company's massive user base -- more than 1 billion strong -- which offers tremendous monetization from advertising. The most recent quarterly report indicated that the company's efforts in mobile are paying off, with net income up $1.5 billion over last year and revenue up more than 50%, largely due to better results in mobile. Yet Sandberg sold millions of shares while this was happening. As the company's COO, she surely knew profits were growing, right?

But like Clean Energy's Littlefair, Sandberg participates in a trading plan, meaning their sales happen outside of their control, allowing them to sell to generate income beyond their cash compensation, diversify their wealth, or give to charitable causes without any chance that they sold based on insider information. This is all part of receiving stocks as compensation, rather than buying them on the open market.

Only one reason to buy?

G

Clean Energy counts UPS as a customer, but fewer than anticipated have followed so far. Source: UPS.

In Littlefair's case, this past September he stopped selling and made a substantial buy of some 127,000 shares on the open market, putting $1.6 million of his own money on the table. However, shares have fallen 30% since, as Clean Energy Fuels' push to shift truckers away from diesel and to natural gas has not paid off as quickly as the market had hoped.

Ullman at J.C. Penney made a similarly large bet, only to see the share price continue to fall as losses build and sales slip. The company's latest update on earnings over the holiday shopping season showed a paltry 2% increase versus the year-ago quarter. This suggests there's little hope that the company can turn things around before it runs out of cash to operate. As colleague Adam Levine-Weinberg

Ullman From Jcp

J.C. Penney CEO Mike Ullman. Source: J.C. Penney.

 points out, J.C. Penney's rate of cash burn and negative earnings indicate that the company has much less than a year before liquidity is a real problem. Chances are, vendors would stop delivering merchandise on credit long before that happened, further shortening the company's leash and leaving shareholders -- like Ullman -- at high risk of total losses. 

Don't project and don't follow blindly
Own your investing decisions; blindly following an insider into or out of any stock offers no advantages and no guarantees. Ullman and Littlefair both made seven-figure investments in their companies, and so far, both have turned out terribly in the interim. Facebook's share price has more than doubled from some of Sandberg's larger sales, but saying she should have waited is moot, because her reasons for selling have nothing to do with your reasons for buying. 

A better approach? Find great companies with sustainable advantages and buy at a good price. If you start with great companies to invest in, it doesn't matter what insiders do.

 

The No. 1 Way to Lose Your Wealth Without Even Knowing It
You’ve fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.

Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it’s too late!
 

Jason Hall owns shares of Clean Energy Fuels and Facebook. The Motley Fool recommends Clean Energy Fuels and Facebook. The Motley Fool owns shares of Facebook. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers