Source: Flickr user Marjan Lazarevski
The third quarter certainly wasn't the most exciting for investors of telecommunications giant AT&T (T 0.04%), with its stock closing essentially flat from where it ended in the second quarter. However, if there was one bright spot investors could focus on, it was that insider buying at AT&T during the quarter was quite strong according to data provided by S&P Capital IQ.
As famed Wall Street investor Peter Lynch once said, "There are many reasons insiders sell, but only one reason insiders buy." With that in mind, let's have a quick look at the differences between insider buying versus insider selling, see what those differences could mean for investors, and then finally take a closer look at the suspected catalysts behind AT&T's insider buying spree.
The many reasons insiders sell stock
Often when an insider, or someone on the company's board of directors or executive management team, sells shares in his or her company, the immediate reaction is one of shock and horror by a good number of investors. However, the truth of the matter is that not all insider selling is necessarily bad.
For example, some insiders sell some of their shares after monstrous runs higher in the underlying stock price. Bill Gates, co-founder and former CEO of Microsoft (MSFT +1.62%), for example, has sold off a large portion of his Microsoft stock over many decades in order to diversify his investments beyond just a single company. In instances where insiders have made a fortune off their stock it's not uncommon or necessarily bad news if they sell a bit.
Another common reason you might see insiders selling a portion of their holdings is for tax purposes. Factoring in salaries, bonuses, and other forms of income, insiders can sometimes turn to selling shares of their stock to pay their tax obligation. This is, again, an orderly disposition of shares and rarely worth worrying about.
Insiders can also sell stock because options they were granted as a bonus or purchased are close to expiring. By executing options and selling shares insiders aren't necessarily placing their vote against their company's future so much as ensuring those options don't expire worthless.
The one situation where insider selling can be a potential concern is when an executive or director unloads a sizable portion of his or her holdings on a percentage basis, especially if the stock has been largely underperforming the overall market.
Source: AT&T
The one reason insiders buy
On the flipside, there's one reason insiders buy their own stock: they believe it'll head higher. A lot of investors place heavy credence in insider buying as they understand that no one understands a business better than its insiders. In other words, if insiders are buying, the business must clearly be in good shape.
Of course, it's worth noting that even insider buying has its caveats and is by no means a guarantor that a stock will head higher. For instance, insiders can set up regularly recurring monthly or quarterly stock purchases in order to average into their stock over the course of the year instead of buying in one lump sum. These recurring purchases might make it appear as if insider buying interest is off the charts, but it might be nothing more than these prescheduled monthly or quarterly buys.
Additionally, investors have to remember that while insider buying is a signal worth watching, there are more factors that influence the direction of a stock. It's the collective trading of millions of investors that determines which way a stock heads and not the collective trades of a handful of executives and directors.
The catalysts behind AT&T's insider buying
In AT&T's case, factoring in both nonopen market transactions and direct purchases, I count more than 40 share acquisitions by company insiders during the third quarter. What's the reasoning behind AT&T insiders' bullishness you ask? I believe there are three possibilities.
First, I do suspect that a number of purchases being made were orderly buys on a monthly or quarterly basis. Examining the buy and sale records, which are required to be filed with the Securities and Exchange Commission, you'll see a lot of the same names and very similar share buy counts on a quarter-to-quarter basis.
Secondly, I suspect that some purchases could have to do with AT&T being a premier defensive play. AT&T is a dividend aristocrat that's currently yielding in excess in 5% and which has raised its dividend for an impressive 30 straight years.
T Dividend data by YCharts
During rampant bull markets AT&T's growth rate doesn't stand a chance of keeping up with high-flying tech companies. However, with the stock market stalling in recent weeks, QE3 continuing to taper off, and geopolitical tensions rising around the globe, we could begin to see investors cycle back into defensive names like AT&T. This "cycling" could cause AT&T's stock to move higher, which is a move some insiders may want to be well in front of.
Finally, don't discount the effect that new technology can have on a telecom provider like AT&T. The release of the Apple (AAPL +3.26%) iPhone always proves to be a big customer driver for the company and it can lead to robust growth in wireless subscriptions, especially in the third and fourth quarter. With the iPhone 6 redesigned and beefed up in size AT&T's insiders could be expecting that growth will surprise Wall Street this holiday season.
The case for AT&T: higher or lower?
While I certainly wouldn't say that AT&T's periodic insider buying is a bad thing, I doubt it holds much bearing on where the company will head next.
Source: AT&T
Instead, investors are going to want to focus on the company's third and fourth-quarter subscriber figures, which, as I mentioned above, should be buoyed by the iPhone 6 release. In addition, AT&T's churn rate, or the number of customers it loses year over year, will be an important factor worth eyeing. Currently AT&T's churn rate is among the lowest in the industry, which is one reason why Brand Keys ranked AT&T as the top wireless company in terms of keeping its customers loyal to the brand. In my opinion, as long as subscribers are up, average revenue per user is steady or rising, and its churn rate remains relatively low, there's no reason to believe that AT&T won't head higher.
