There are plenty of reasons an insider might sell that have little or nothing to do with the health or prospects of the business. On the other hand, there may be excellent reasons an insider would sell that have everything to do with the company’s near-term prospects. In short, insider selling can be tricky. Sometimes it’s a negative signal. Other times it’s not. But turn the equation around. Pay attention when insiders buy significant amounts of their own companies’ stock with their own money at the current market price. Given all they know about the company, including plenty of non-public information, they feel the shares are selling for a lot less than what they are worth.
Insiders know about:
– Direction of sales since the last quarterly report
– Expansion plans and/or potential mergers and acquisitions or takeover interest
– Gain/Loss any key customers
– New products in development
– Status of pending litigation, law suits, licenses and permissions
– Other very important information unavailable to the public
This is the reason why the SEC requires corporate insiders to file forms and to give details about any purchase or sale.
Even when recent developments at the company are worse than expected, if the insiders are buying heavily it is generally a sign that the company’s prospects are about to change. Plenty of research shows that stocks with heavy insider buying tend to outperform the broad market in the months that follow. No market signal is perfect, but insiders clearly have an unfair advantage. Strong insider interest is probably the best buy signal you can get.
Sven Franssen