Corporate insiders are selling their company’s shares at a breakneck pace that hasn’t been experienced in over ten years. This insider activity is a loud warning on the pessimistic meter. Average investors are looking at the reports of insider sales and may now be wondering how worried they should become.
This selling has raised some concerns, as significant insider offloading has reliably predicted recessions that then developed over time. However, it does not necessarily indicate negative future prospects for the firms where executives are selling.
Understanding Insider Trading
Insider trading involves the buying or selling of a public company’s stock or other securities based on material, non-public information about the company. The activity is illegal when it’s based on information not generally available to the public, as it would be an unfair advantage for those with insiders’ knowledge and would undermine market integrity. However, Legal insider trading occurs when corporate insiders, such as officers, directors, and employees, buy or sell their company’s stock but follow specific regulations including reporting their trades to the Securities and Exchange Commission (SEC). These trades must be reported within a few business days to ensure transparency and allow for monitoring by regulators.
There are many reasons for insiders to buy or sell, only one of which is expectations of weakness in the company’s stock price. Most investors will still remember the example when Tesla (TSLA) insider Elon Musk sold $8.5 billion of his Tesla shares within three days after Twitter agreed to be acquired. Other insiders also have personal reasons to liquidate shares.
Optimistic Industries
Despite insider sales at companies like Airbnb $(ABNB), Mastercard (MA), and Paycom (PAYC) continuing to be high with no end in sight, it does not mean investors should be worried about its stock near-term future. For example, after Airbnb insiders sold 1,575,285 shares worth $233.1 million, the company reported a 17.8% year-over-year revenue gain, carried by a growing travel boom. Mastercard insiders sold shares worth $2.28 billion, but the company is positioned for double-digit growth as it benefits from the shift from cash to digital payments. Paycom (PAYC) insiders sold 169,012 shares worth $26.7 million, but the company continues to experience rapid growth in its cloud-based HR solutions, with no signs of slowing.
These are just a few examples of insider selling that may be driven by other factors, including insiders enriching their lives with new homes or other luxuries.
Pessimistic Industries
On the gloomier side, the broader market is grappling with high valuations and the potential for a rotation away from mega-cap tech stocks. The so-called “Magnificent Seven” stocks, which have driven much of the market’s gains this year, are now facing increased cautiousness and profit-taking as investors reassess their high expectations for AI and other tech-related growth. This has led to a shift towards smaller-cap stocks and more cyclical market areas, although this rotation has been uneven and may not fully offset the declines in tech. The shift away from high-valuation tech stocks reflects a growing caution among investors, which could prolong the market downturn.
Key Takeaways
There has been more insider selling than seen in more than ten years. This often indicates a recession 12-18 months out. However, many companies that are selling do not appear to be facing a challenging future. Could it be that insiders are just taking some chips off the table and converting them into new toys or luxury items? Time will tell, but the stocks trading at the highest earnings multiples seem to be at the most risk of a correction, as a rotation to small-cap and value is a move that is growing.
