There are few people who know more about a company than the executives and board members of that company. These insiders live in the day-to-day operations of their specific organizations, and likely have a better feel for future prospects than any amount of research can provide outsiders.
Insider stock purchases
There are few reasons to purchase stock in a company other than having confidence in the future. When Nikola's outgoing charismatic board chairman, Trevor Milton, purchased $1 million worth of company stock earlier this month, it seemed notable. Regardless of the negative press that came with the move, Milton most likely still had a more complete understanding of Nikola than we had at the time. The news led some to take this as an objectively bullish decision.
When digging into the details, however, the bullishness is not so clear. Milton's $1 million purchase doesn't seem like such a large vote of confidence when it's reconciled with his $3 billion in net worth that's powered solely by founding this pre-revenue company.
The purchase also came after a short report by Hindenburg Research alleged Nikola had mislead the public, and investigations into the matter began. It's feasible that Milton spending less than 1% of the fortune Nikola had already made him wasn't all that meaningful.
More recent news that Milton has stepped down from the Nikola board was simply another, far more objective, piece of evidence that the purchase was not as positive as insider purchases sometimes are.
It's important to note that normally, insider stock purchases are a bullish sign. Executives putting their money where their mouths are should typically give investors incrementally more comfort in owning shares. Still -- like in the case of Nikola -- it's imperative that investors research the details and context that coincide with the transaction.
Insider stock sales
It's even more difficult to derive meaning from the the sale of stock than from a purchase. Executives have private living expenses to cover, and often can have a large chunk of their net worth tied up in the company. Selling a small fraction of a stake can be bearish, but it can also be altogether unrelated to that executive's sentiment.
For example, CrowdStrike CEO George Kurtz has been selling shares since his company debuted publicly in 2019. Over the last 90 days Kurtz has made six separate sales totaling nearly $100 million. At first glance this seems worrisome, but considering he owns 10.4% of the company (worth nearly $3 billion today) these sales represent just 3.3% of his personal stake.
Perhaps more importantly, the CrowdStrike shares Kurtz sold were all from exercised options, meaning his voting rights in the company and its future remain unchanged. With the vast majority of his net worth tied to CrowdStrike's sales performance -- and with the stock price up over 120% since CrowdStrike's public debut -- this CEO taking a small amount of chips off the table is far from the worst sign in the world.
Every case is unique
While it's tempting to see an insider trade and jump to conclusions, each transaction has unique context that must be considered alongside the dollar amount. In the cases of Milton and Kurtz, understanding the full picture allows us to glean more accurate meaning from these insiders' investment decisions. As it turns out, that's usually the case.