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Insiders Sell, Outsiders Buy

No matter how well you think you know a company, the inner workings of its business, the significance of its numbers, and what makes its stock tick on Wall Street, every once in a while the market throws you a total curveball. When Wall Street reacts to a piece of news counterintuitively, this can make a Fool doubt his eyes, the accuracy of CNBC's electronic ticker tape, even his own reasoning.

Friday was one such day.

Back in December of last year, Hidden Gems pick Middleby (Nasdaq: MIDD  ) announced the retirement of its then-chairman, William F. Whitman, in favor of its then-and-now CEO, Selim Bassoul. As I wrote back then, the deal was at worst a wash for shareholders of Middleby -- and at best, a great deal for the company and those who remained shareholders in it. It took the market a few days to come around to this way of thinking, but ultimately Wall Street saw the light. And over the succeeding months, Middleby rose nearly 20% in value, far outpacing the broader market indices.

Return now to the present day. On Thursday, Whitman and his family resumed selling off their remaining stake in the company. With the assistance of investment bank Lehman Brothers (NYSE: LEH  ) , they sold an additional tranche of 1.4 million shares to the public in a so-called "secondary offering," priced at $56 a stub.

Just to make sure we have our terms straight, let's clarify: When a private company first sells shares to the general public, we call that an "initial public offering." When the now-public company decides to raise more cash by creating, and selling, more shares, it does this through a "follow-on offering." Neither of these things happened on Thursday. Thursday's event was a "secondary offering," whereby no new shares are created -- rather, somebody just sells a large number of shares that already exist.

Thus, Thursday saw no additional shares diluting existing shareholders' stakes. So it was not "bad" news. Thursday also saw no new money flowing to Middleby that would strengthen the company's balance sheet. As such, it was not "good" news. So if the news wasn't bad, but also wasn't good, then why did the stock spike upward by $3 and change in Friday trading?

The truth is probably as banal as this: The market sometimes just plain overreacts to non-events. Seven months ago, the market overreacted to the negative side; Friday, to the positive side. Over the long term, investors will do better to pay less attention to who is selling stock and why -- and focus on the performance of the company.

AtMotley Fool Hidden Gems, we don't just recommend a stock and forget about it. We constantly monitor each and every one of our recommendations and keep you updated on major (and the occasional minor) developments -- not just through articles on, but in mid-month and semi-annual reviews in our newsletter. Take a free trial right now and you can see not just our past recommendations, but read the mid-month updates and six-month reviews for everything we've recommended in the past. Twenty-five months of extra Foolish wisdom. No extra charge.

Fool contributor Rich Smith has no position in any of the companies mentioned in this article.

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Related Tickers

9/17/2008 3:28 PM
LEH $0.13 Down +0.00 +0.00%
Lehman Brothers Ho… CAPS Rating: *
MIDD $114.27 Down -1.45 -1.25%
Middleby CAPS Rating: *****