What happened

While markets basked in the summer sun last month -- the S&P 500 climbed 3% and the Dow Jones Industrial Average rose 1.8% -- shares of MP Materials (MP 4.97%) headed in the other direction. The rare-earth elements mining company saw its stock fall 11% in August, according to data from S&P Global Market Intelligence.

Although shares popped higher early in the month following the company's Q2 2021 earnings report, the enthusiasm wasn't sustained in the following weeks; an insider transaction proved to weigh too heavily on investors' minds.

A shocked woman looks at a laptop.

Image source: Getty Images.

So what

The month began on a positive note for MP Materials after the company reported strong earnings on Aug. 5. Beating analysts' estimates on both the top and bottom lines, MP Materials also impressed on the cash flow statement. The company reported operating cash flow of $38.6 million and free cash flow of $13.2 million -- impressive figures considering the company generated operating cash flow and free cash flow of $9.3 million and negative $10 million, respectively, in the first quarter.

MP Chart

MP data by YCharts.

But then, days later, the company reported an insider transaction. In an SEC filing dated Aug. 12, Andrew McKnight, who serves on the company's board of directors, disclosed the sale of 150,000 shares of MP Materials in two transactions, totaling more than $5.7 million.

Now what

It's common for people to follow the moves of company insiders; however, it's reductive for investors to assume that buying shares after an insider buy and selling shares after an insider sells is a prudent strategy. An insider's decision to sell stock may signal that there is something concerning about the company, but it's far from a guarantee; there are plenty of reasons someone would choose to sell shares and free up some cash.

The stock's sell-off last month, therefore, seems like an overreaction, presenting potential investors with the chance to pick up shares at a more attractive price than they were at earlier in the summer. Of course, if other insiders begin to sell shares as well, it may be an indication that something is amiss with the company.