Insider Selling What Does It Really Mean? From Dudley Baker
Insider selling
Resource shares have risen substantially in price over the last many months and it is not unusual to see insiders reporting substantial sells and taking some profits. If you see insider selling in a company that you own what should you do?
Corporate insiders would be defined as officers, directors and 10% plus shareholders of a company. They are a group that investors love to love and love to hate.
If you hear of insiders buying you normally would interpret this as a great forecast of the confidence they have in the company’s future and in all probability a rising share price.
Insider selling is much more difficult to interpret because there are many factors to take into consideration. At the first sign of insider selling we would advise you to take a deep breath and do nothing. The insiders are noted for selling early so don’t panic and sell to soon.
Yes, we want to stay abreast of their selling activity but they frequently miss the big move up. Several of the gold and silver companies which we follow have 3, 4 or more of the corporate insiders selling and the shares have continued to rise 50% or more. Again, exercise patience but have your hand on the trigger ready to sell if the market turns down.
Remember that many officers and directors do not necessarily have a lot of money to invest. They may receive stock options but may not have the funds to buy shares in the open market. Some of them are geologists, accountants, investor relations personnel, etc. and are working for a salary.
The reasons for selling shares in their company is limitless, i.e. college tuition for kids, buying a new house, health issues, divorce, etc. What concerns us as investors would be if they, the insiders, are selling because of negative events at the company. This is not always easy to discover but if we see massive selling we would probably be exiting our positions as soon as possible.
Our basic philosophy is; why should we as investors be buying if the insiders are selling? I hate to think that I just bought the shares that an insider has sold. While in the long run this may not be relevant I would prefer to be investing in another company.
Let’s cover two different situations for you.
Establishing a New Position
If you do not currently have a position in common shares of a company we suggest checking out the insiders buys and sells before entering a position. If the insiders are buying, this information will re-enforce your decision to buy. But if the insiders are selling, this should at least give you reason to pause.
You’re excited and want to enter a new position recommended by your favorite analyst or newsletter but the insiders are selling and you must decide what to do.
Several steps we would recommend to investors:
- Look at a chart for the last year
- Have the shares moved up substantially in price
- Are the insiders selling into the rise in price
- How many insiders are selling
Each situation is different but if the shares have moved up substantially, say 100% or more and there are two or more insiders selling, I would not purchase these shares. Let’s look for other opportunities.
Evaluating a Current Position
Let’s assume you were fortunate to purchase some junior mining shares and have seen the share price rise 100% or so but it has come to your attention that some of the insiders are selling. What should you be looking for?
- How many insiders are selling
- Did the insiders sell only one time or perhaps you see a pattern of selling
- Look at a chart for the last year
The good news in this situation is that you have a profit but you need to make sure you do not let it slip away. You only make money when you close out your trade so be smart about it.
If only one officer is selling we would tend to stay with the position but watch it very carefully. If two or more insiders are selling we would be much more concerned and would probably take some profits ourselves.
If you really like the company we suggest you sell half of your position and ride with the balance which is now free as you have captured a 100% profit. If you are neutral or negative on the company now is the time to exit your trade in total, capture your gains and look for new opportunities of which there are many in the natural resource sector.
What if insiders do not own any shares or only a small share position in a company which you own or are considering buying? In our opinion, the insiders of any company should have a significant position which we refer to as ‘skin in the game’. Ask yourself the question, if the insiders don’t have a position then why should you?
The buying and selling patterns of corporate insiders can be very telling and should be of interest and considered by all investors as part of their investment approach.