Insider Selling Jumps to a Record as Stocks Climb to Highest in Two Years

Insider selling at Standard & Poor’s 500 Index companies reached a record in the past week as executives took advantage of a two-year high in the stock-market to sell their shares.

Executives at 125 companies in the S&P 500 unloaded shares between Nov. 3 and Nov. 9, while sellers outnumbered buyers by more than 12 to 1. The readings are the highest based on data going back to January 2004, according to Princeton, New Jersey- based InsiderScore.com, which analyzes insider transactions disclosed to the Securities and Exchange Commission. Total net sales reached $4.5 billion, helped by Microsoft Corp. Chief Executive Officer Steve Ballmer’s divestment of about $1.34 billion in his first stock sale in seven years.

CEOs, directors and senior officers sold stocks as the Dow Jones Industrial Average last week rallied to its highest level since before Lehman Brothers Holdings Inc.’s September 2008 bankruptcy. The gauge closed at a 12-year low on March 9, 2009, before advancing 73 percent through yesterday. The S&P 500 has jumped 16 percent since the end of August, completing five straight weekly gains to close on Nov. 5 at the highest level since the week after the Lehman filing.

“That they’re selling at the top of the market is not a good sign,” said Hank Smith, chief investment officer at Haverford Trust Co., which manages about $6 billion in Radnor, Pennsylvania. “It’s not necessarily a sign the market is popping, because insiders always have several reasons to sell and only one reason to buy: thinking the stock will go up.”

Capital-Gains Taxes

While insider selling may make investors more skittish because executives presumably have the best information about their companies’ prospects, insiders may have chosen to sell now because of uncertainty about whether the capital-gains tax cuts enacted under President George W. Bush will be extended, according to Smith. The law from 2003, which reduced the capital-gains tax rate for assets owned at least a year to 15 percent from 20 percent, will expire in January unless President Barack Obama and Congress extend it.

Microsoft’s Ballmer, who took over from Bill Gates as CEO of the Redmond, Washington-based company in 2000, said on Nov. 5 that he plans to sell as many as 75 million shares, or $2 billion based on yesterday’s closing price, to diversify his holdings and help with tax planning before the end of the year. Ballmer has already sold about 50 million shares, according to a regulatory filing.

Bull Market

“We are in a bull market, which typically translates into more insider selling,” said Ben Silverman, the Seattle-based research director at InsiderScore. “Capital gains tax policy may change next year and that could contribute to the selling as well -- although insiders rarely say why they’re selling.”

The end of earnings season may also contribute to the increase in insider selling, according to Silverman, as executives are prevented from buying or selling company stock ahead of announcements. Of the companies in the S&P 500, 426 have reported since Oct. 7, according to data compiled by Bloomberg.

Insiders increased their disposals as profits for companies in the S&P 500 are forecast to rise 37 percent to a combined $84.92 a share in 2010, according to estimates compiled by Bloomberg. That implies a price-earnings ratio of about 14.4, compared with an average multiple of 20.6 since January 1990, according to data compiled by Bloomberg.

Insider selling among 5,168 publicly listed U.S. companies reached a four-year high, InsiderScore data show. The number of sellers doubled to 419 from 195 in the week before as they outnumbered buyers by more than 4 to 1.

Index Gains

The S&P 500 rose 0.4 percent to 1,218.71 yesterday in New York. The Dow gained 10.29 points, or 0.1 percent, to 11,357.04.

Insiders of S&P companies have been net sellers for 17 straight weeks, according to InsiderScore. U.S. laws require executives and directors to disclose stock purchases or disposals within two business days. The weekly data doesn’t include transactions related to options and so-called 10b5-1 programs, which allow executives to cash out a portion of their holdings when stocks reach predetermined prices.

InsiderScore’s Industry Score metric also reached a record -3.6 in the past week, an indication of bearishness for investors who follow it. The gauge measures insider sentiment by recording buying and selling combined with the position of the insider, how the transaction impacts an insider’s holdings and whether the disposal or acquisition came while the stock was strong or weak, among other data.

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net;

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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