Insider Selling: How To Profit From The Insiders’ Unfair Advantage

At The Oxford Club’s latest investment conference in Charleston last week, an attendee told me he was shocked by the level of insider selling in some of his stocks.

Should he sell? Not necessarily.

There are plenty of reasons that officers or directors might sell - reasons that have nothing to do with the outlook for their business.

Take Bill Gates, for example. He’s been a regular seller of Microsoft (MSFT) for decades. Is it because he doesn’t like the outlook for his company?

Admittedly, Microsoft has been a dud over the past 10 years. But a more likely reason is that the overwhelming majority of Gates’ net worth is tied up in the stock.

And even Bill Gates has an overhead. He has to sell shares from time to time to pay his bills.

But don’t think that Gates is bailing on the stock. He has over 713 million shares left.

In short, there are lots of reasons when insiders sell that have absolutely nothing to do with the near-term prospects of the business.

When Insiders Sell, Don’t Panic

For example, an insider might sell…

• To diversify his portfolio.
• Maybe he’s getting a divorce and has to sell half his shares.
• Insiders might sell to meet a specific financial need - like paying for a second home or Ivy League tuition for their children.

On the other hand, there are good reasons an insider would sell that have everything to do with the company’s near-term prospects. The insiders at Enron, for example, sold $1.1 billion-worth of the stock in the 12 months before the company filed bankruptcy.

So insider selling is tricky. Sometimes it’s a negative signal. Other times it’s not.

But turn the equation around…

How Insider Buying Led to a 77% Gain on Seagate

Why would corportate insiders buy significant amounts of their own companies’ shares with their own money at current market prices?

There is only one logical answer… given all they know about the company - including plenty of material and non-public information - insiders feel the shares are selling far below their intrinsic worth.

And that’s a signal worth noting.

For example, five months ago, I noticed heavy insider buying at digital storage leader Seagate Technology (STX).

At the time, the economy was in the tank, technology spending was in a freefall and the company was unprofitable.

But top executives rarely throw their money down a rat hole. And that’s particularly true of Seagate chairman and CEO Steve Luczo, who was investing millions.

So I alerted my Insider Alert subscribers to the telltale signal. Just a few months later, our shares are up 77%. And we’ve had dozens of other winners this year, too.

Insiders Selling or Buying… Use It to Your Own Advantage

Does insider buying always pan out? Of course not. No market signal is infallible.

But insiders clearly have an unfair advantage. That’s why the federal government requires them to file a Form 4 with the SEC every time they buy or sell their own companies’ shares.

Insider buying is one of the most compelling signals you can get. When you see officers and directors piling into their stock all at once, you can safely ignore what the analysts’ are saying.

After all…

• Insiders are running the company, not analysts.
• Analysts don’t have access to material, non-public information. Insiders do.
• Most significantly, analysts are putting up opinions. Insiders are putting up their own money.

Who do you really want to listen to?

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