Insider Selling Is Different This Time
According to the Financial Times, U.S. corporate executives are selling stock of their employers at the highest level since 2000. Data from Britain-based Smart Insider, a firm that tracks insider stock activity, and strips out sales for tax purposes, ownership limits and other non-market factors. This year, through mid-September, combined insider sales of stock reached $19 billion, trending toward $26 billion by the end of the year, surpassing the post-crisis summit of $25 billion in insider selling in 2017.Of course, the rise in stock prices plays a role in the insider’s decision to sell a stock. Most corporate executives’ compensation packages include stocks or warrants, and this component is sometimes higher than their cash pay out.
Are We in a Stock Bubble?
Is that what we’re seeing with the current insider selling?Perhaps; but it’s not likely. For one thing, from a relative value perspective, it doesn’t appear that the two periods are comparable. Today’ stock market valuation is more than twice than it was then. The billions in insider selling then become much less relative to the total market than it was in 2000.
Also, the dot com bubble was truly an instance when companies with zero revenues were given outrageous valuations based primarily upon speculation about future valuations. That’s often a risk that accompanies first generation technology companies and their world-shaking impact. If that is the case today, it is mostly in the unicorn private equity space, outside the public stock market.
Retail Weakness
For example, some of the major insider sellers today are in the retail industry. That’s a much less frothy sector than technology or biomedical ones. It’s the Walton family and executives, owners of the retail giant Walmart, along with cosmetic company Este Lauder and women’s athletic wear leader Lulumon Athletica who are leading in insider stock sales. That just doesn’t have the same reckless feel like the dot com bubble.Federal Reserve Can’t Be Overlooked
Another huge factor in the growth and stability of the market is the Federal Reserve. From 2008 through 2015, its policy of quantitative easing injected much needed liquidity into the economy, with much of it supporting the stock market. Quantitative easing had the direct effect of raising asset prices in the markets. Starting November, the Fed will once again begin quantitative easing. Whether it impacts stock prices as it has in the past, however, remains to be seen.Of course, the unknown outcome of the U.S. trade war with China may also be a reasonable factor driving insider stock sales. As the optimism-to-pessimism cycle continues without an end in sight, doubts about pricing and supply chains increase. Doubts about the global economic outlook as a whole are pervasive.
Do Insiders Show Us When to Buy and Sell?
These factors all impact selling decisions of insiders, but don’t necessarily point toward a market correction, or more narrowly, even a correction in a company’s stock price. Other, more salient indicators, such as forward price-earnings (a forward look at expected earnings) and cyclically adjusted price-earnings (typically over a rolling 10-year period) ratios, cashflow, debt, and other business metrics are better indicators of a company’s near-term price.Bearing all this in mind, should investors be tracking and mimicking buy and sell actions of insiders? How well do insider sellers – or buyers – do in their actions? Are they making money or losing it?
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