The media rarely hesitates to point out when executives sell stock in their companies -- especially when those sales seem exquisitely timed to benefit the seller. But there are a lot of reasons for an insider to sell shares.
By contrast, buying stock as an insider really only makes sense if you believe the shares are undervalued. That's why it is a much more reliable indicator of management's outlook for a company. And buying is exactly what insiders at Sherwin-Williams (SHW -0.91%) are doing. CEO John Morikis is a good example. With the stock down, he's adding to his position. Should retail investors do the same?
A historic sell-off
Shares of the paint maker have been crushed since the beginning of the year. Indeed, the drop has rivaled the sell-off that occurred during the housing crash of 2008. That would seem to make it an opportune time for long-term investors to pick up shares.
However, Sherwin-Williams stock is also still up by more than 90% since the beginning of 2019. And rising interest rates put the housing market at risk. And a stock price has no memory. That's why investors often pay less attention to prices in the abstract, and more attention to metrics like price-to-sales or price-to-earnings ratios.
A lofty valuation
From that perspective, Sherwin-Williams shares aren't cheap even after their recent steep drop. They trade at a price-to-sales ratio 70% higher than they did at the beginning of 2019. The company's price-to-earnings ratio is also elevated compared to where it has been during many periods over the past five years.
Skin in the game
From a capital allocation standpoint, the company has been buying back shares for years. It has reduced the share count by about 8% since the beginning of 2018 and 16% over the past decade.
It seems insiders at the company have decided to join in. In February, Morikis made an outright purchase of shares. The transaction was only for about $500,000. And he has cashed in about $9 million worth of equity already this year.
But according to SEC filings, Morikis directly owns about 321,000 shares, worth in the neighborhood of $80 million. (He owns another 70,000 indirectly.) That's up from 278,500 at the end of 2021 thanks to restricted stock vesting. Considering that he already has such a large stake, spending another $500,000 on the stock after a 30% drop seems like a clear vote of confidence.
The big picture
No one knows where a company's stock price will go in the short term -- not even the CEO. And there are significant concerns that could affect the demand for Sherwin-Williams' products. Rising interest rates, a severe shortage of housing stock compared to demand, and high inflation could all dent its business over the next year or two.
But shareholders should feel good that Morikis isn't just holding on to the stock he has earned. He's spending his own money to buy more. It's hard to think of a clearer vote of confidence than a company and its CEO buying shares in tandem.