By Chris Taylor
NEW YORK, April 11 With the Dow hitting so many
fresh highs of late, some investors may be dusting off the 1999
bestseller "Dow 36,000," a book that briefly made "irrational
exuberance" seem quite rational.
Even Alan Greenspan, the former Federal Reserve Board
chairman who coined that description of market sentiment before
the dot-com bust, has mused publicly that stocks are
But at least one group has been actively selling into the
rally: corporate executives in the best position to know about
their companies' prospects. In February, officers and directors
sold $35.30 worth of shares in their own companies for every
dollar they put into stocks.
That is the highest monthly ratio since TrimTabs Investment
Research began tracking the data in 2004, says David Santschi,
chief executive of TrimTabs, based in Sausalito, California. A
more typical ratio is around 8 to 1 of selling over buying.
"It is a sign that company officers and directors think the
market is richly valued," Santschi said.
Looking at price-to-earnings ratios, a common metric for
valuing companies, they may have a point: The SP500 is
now trading at 18.35 times trailing earnings, up from 16.26 a
year ago. The long-term average for the index is 15.49.
Indeed, the trend since May 2012 has shown company insiders
selling rather than buying by a larger-than-usual margin. In the
first quarter of 2013, insiders sold $11.86 billion worth of
shares, compared with barely $1 billion in purchases.
For retail investors who are finally getting over their fear
of the market, it is a worrisome indicator - though not
necessarily a "race for the exits" signal. Companies that have
high and rising levels of insider selling often follow that up
with share price underperformance, market studies show.
But company officers and directors - who must file records
of their purchases and sales with the U.S. Securities and
Exchange Commission - have many personal reasons for selling
that don't necessarily point to a market or individual company
Executives sell for a range of reasons: Sometimes they just
want to cash out some options to pay a tuition bill or put a
down payment on a vacation home. Others want to reduce their
dependence on any single company's future - or pull money out at
an opportune time.
The list of insiders involved in large sales in early April
includes Google Inc. co-founder Sergey Brin ($67.5
million worth of shares); LinkedIn Corp. co-founder
Reid Hoffman ($14.5 million); Gilead Sciences Inc. CEO
John Martin ($13.6 million); and Dollar General CEO
Richard Dreiling ($12.3 million).
A Dollar General spokesman said Dreiling's stock sale was
part of a "planned diversification program," and LinkedIn
offered that Hoffman's "automatic stock sales are part of a
personal investment diversification strategy."
Gilead Sciences had no comment on Martin's transaction.
Google Executive Chairman Eric Schmidt sold over $191
million of company stock in one February week - after a stellar
year that left the share price hovering around $800.
As the sale amounted to about 42 percent of his stake, the
company released this statement: "This is a routine
diversification of assets, and Eric remains completely committed
A RED FLAG?
Even so, when so many insiders sell instead of buy, it
becomes an intriguing clue to their collective take on the
market - and not an upbeat clue.
"Rising selling to net buys is a net negative for the
market," said Kristen Hendrickson, an analyst with The Leuthold
Group, a Minneapolis-based institutional research firm.
Leuthold analysts have seen unusually high selling patterns
among the so-called "big-block" insider stock transactions they
track - transactions of at least $1 million in total value, or a
minimum of 100,000 shares.
At the end of 2012, there were 150 more big-block sales
transactions than purchases over a 10-week period. That compares
with a 10-week moving average of 60 more big-block sales than
purchases since 1982, when Leuthold began tracking that data.
"It is a critical indicator of the sentiment of corporate
executives, and what they are seeing in the future," said
The ratio of insider selling to buying has reached sky-high
levels two other times: In mid-2000 as the dot-com bubble burst,
the average spread of big-block sales over buys crested close to
250. In 2006, before the financial crisis hit, the same average
hit a peak of 220.
Recently it has hovered around 125 - not quite as high, but
still more than double the long-term average.
Of course, insider selling is just one indicator of market
direction. Leuthold's Major Trend Index tracks 130 different
components, only two of which measure insider activity (number
of transactions and total dollar volume involved).
Leuthold analysts say they remain bullish about the market's
prospects as a whole, thanks to other positive indicators, such
as market momentum.
That said, the negative signal that insider buying throws
off is often company-specific as well as market-specific.
Stocks with significant insider selling tend to underperform
the market, particularly after one to 12 months, said Jonathan
Moreland, research director at InsiderInsights.com.
"The ultimate situation you are looking for is three or more
insiders at a company, all of whom have great track records at
trading company shares, all selling big dollar amounts that add
up to a large percentage of their holdings," Moreland said.
Stocks with significant insider buying rose 87.1 percent
between the beginning of 2009 and April 2010, more than double
the 36.8 percent gain recorded by companies with big insider
selling, according to InsiderInsights.com.
ADVICE FOR INDIVIDUAL INVESTORS
Insider sales in the aggregate are much like national
home-price averages: they don't offer enough specific detail.
Just as real estate prices in one area could be rising or
falling, so too will insider buying and selling vary with each
For that kind of granular information, useful websites
include GuruFocus.com, InsiderInsights.com, FINVIZ.com and
You can also search for activity on individual firms at the
website of the U.S. Securities & Exchange Commission ()
or on the Reuters.com website.
The best advice for individual investors is to use insider
selling data in conjunction with other indicators, TrimTabs'
Santschi said. Buy-back programs paired with significant insider
buying is a positive signal, while buybacks combined with
insider selling might mean it's time to take some profits.