Astute and observant readers write to me from time to time to ask if the CEO of XYZ Exploreco selling shares is a reason to sell the stock ourselves. Conversely, some want to know if the VP for exploration buying shares is a signal that we should buy. Insiders, after all, would know if a company is about to announce some great or terrible news.
First, I want to say that it’s great that folks are paying this much attention. The rock-kicking due diligence guy in my heart approves.
(For those who don’t already use it, CanadianInsider.com is an easy source for this information on many of the Canadian stocks resource investors are interested in. Regulatory filings are another source.)
But interpreting this data is not as simple as insider buying = good, insider selling = bad.
Here are some important considerations to keep in mind:
- Management knows that investors look at insider trading. Some may stoop to buying shares in order to manipulate investors into doing the same.
- Insiders have blackout periods and are not supposed to be able to trade when they have material information not yet released to the public.
- If insiders bought large numbers of shares the day before terrific drill results came out, that would be a reason to distrust them, not to buy the stock.
- It’s important to see if a “disposition in the public market” comes paired with an exercise of options. Remember that options are usually an important part of management’s compensation. There’s nothing necessarily bad about them selling some option to get paid for their work.
- For me, insider selling is more of a red flag if the people doing the selling are independently wealthy. If they don’t need the money and believe in the company, why sell?
- Also note that successful, wealthy people will often give shares to charities and such. This counts ad a disposition of shares, but is clearly not a bearish signal regarding the company.
- Sometimes management will sell a large block of shares in a cross to an important investor who wants in, but at a time when the company doesn’t need to do a private placement. Such across keeps shareholder dilution down, which is a good thing.
- If multiple members of a management team have been selling persistently over a period of months, that would be a red flag for me. That’s when I pick up the phone, and the answers I get better be good.
- If multiple members of a management team have been buying persistently over a period of months—especially if the stock has been in a slump during a period no news of stagnant or lower commodity prices—then that’s a positive sign in my view.
No need to beat this to death. The basic message is that insider trading is something I include in my due diligence, as it can provide valuable information. We just need to interpret the data with care. And if we’re not clear on a transaction, it’s important to dig deeper until we are.
Caveat emptor,
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