Corporate executives are taking advantage of near-record U.S. stock prices by selling shares in their companies at the fastest pace in two years.
There were about 12 stock-sale announcements over the past three months for every purchase by insiders at Standard & Poor’s 500 Index (SPX) companies, the highest ratio since January 2011, according to data compiled by Bloomberg and Pavilion Global Markets. Whenever the ratio exceeded 11 in the past, the benchmark index declined 5.9 percent on average in the next six months, according to Pavilion, a Montreal-based trading firm.
Confidence in equities from individual investors may soften the blow from insider sales this time, according to Pavilion’s Pierre Lapointe, head of global strategy and research. Rather than signaling the market has reached a peak, the transactions may reflect aging executives and board members seeking to lock in profits from a four-year rally before they retire, Damon Vickers & Co. said.
“These middle-aged executives, a lot of them, have waited some 13 years for their assets to see the light of day,” Damon Vickers, chief investment officer of the Seattle-based broker, said in a Feb. 14 phone interview. “They’ve had to endure a tremendous amount of volatility. And if you’re 61 years old and the majority of your net worth is tied up in your company’s stock, you may be inclined to liquefy some of that, just from a standpoint that you’re nearing retirement.”
The ratio of sales versus purchases by chief executives, directors and senior officers at S&P 500 companies is more than twice the average ratio of 5.4 over the past 10 years, according to data compiled by Bloomberg and Pavilion. In the months after the ratio was last at this level, the benchmark index retreated as much as 19 percent from April to October of 2011.
“You have continuing conservatism and credence in people’s personal financial transactions, which means a low level of stock ownership,” Michael Holland, chairman and founder of New York-based Holland & Co., said in a Feb. 15 phone interview. His firm oversees assets of more than $4 billion. “It’s just one more reflection that people are continuing to be careful, cynical and skeptical about the market.”
Stock sales have been led by insiders at companies from Dollar General Corp. (DG), the largest U.S. dollar-store chain, and BlackRock Inc. (BLK), the world’s biggest money manager, who unloaded more than $5.3 billion worth of shares in each of their companies in the past year, according to data compiled by Bloomberg. Other big sellers were from Microsoft Corp., with $2.4 billion, and Capital One Financial Corp. (COF), with more than $3 billion in sales, according to data compiled by Bloomberg.
Executives may be reacting to concerns about slower economic growth triggered by the increase in payroll taxes and possible government spending cuts as the debate over the federal budget rages in Washington, according to Philip Orlando, chief equity strategist at Federated Investors, which has about $380 billion in assets under management.
“Washington starts merging with Wall Street and Main Street at this point, and these are the things that are weighing on these folks’ minds,” New York-based Orlando said in a Feb. 19 phone interview. “You’ve had this terrific run in stocks to start the year and you’ve got insider selling disproportionately swamping buying. Are we due for a pullback at some point here over the next month or two? The answer’s probably yes.”
Executives at 153 companies in the S&P 500 unloaded shares between Feb. 11 and Feb. 15, with announcements of sales outnumbering buys by 17 to 1.
Among the biggest transactions last week were a $65.2 million sale by Google Inc.’s 39-year-old Chief Executive Officer Larry Page, a $40.1 million disposal by News Corp.’s 81- year-old Chairman and CEO Rupert Murdoch and a $34.2 million sale from American Express Co. chief Kenneth Chenault, who is 61. Nolan Archibald, the 69-year-old chairman of Stanley Black & Decker Inc. who plans to leave his post next month, unloaded $29.7 million in shares last week and Amphenol Corp. Chairman Martin Hans Loeffler, 68, sold $27.5 million, according to data compiled by Bloomberg.
Google Chairman Eric Schmidt, 57, announced plans to sell as many as 3.2 million shares in the operator of the world’s most-popular search engine. The planned share sales, worth about $2.5 billion, represent about 42 percent of Schmidt’s holdings. The share sales are for Schmidt’s individual asset diversification and liquidity, Mountain View, California-based Google said in a Feb. 8 filing with the U.S. Securities and Exchange Commission.
“Insiders are not buying the current rally,” Pavilion’s Lapointe wrote in a Feb. 11 research note. “The recent gains have given them reason to sell their own stock. History tells us that high insider selling is usually followed by disappointing S&P 500 returns in the following months.”
Still, Lapointe wrote, “insider transactions do not move markets, large inflows do” and stocks should be supported over the short term by individual investors pumping money into equities.
Investors deposited $37 billion into equity funds in January, the most since 2004, after pulling almost $300 billion out of stock funds since the market bottomed, estimates from the Washington-based Investment Company Institute show.
The S&P 500 has rallied more than 6 percent in 2013 and this week climbed to within 2.3 percent of its record reached in October 2007. The index has more than doubled since bottoming in March 2009 as the Federal Reserve conducted three rounds of bond buying to boost economic growth. The S&P 500 tumbled 1.2 percent yesterday, its biggest drop since November, as minutes from the Fed’s last meeting spurred concern the central bank was considering curtailing the stimulus efforts.
Earnings topped estimates at 71 percent of the 413 companies in the S&P 500 that have released earnings so far in the reporting season, with about 66 percent topping sales expectations.
High insider-selling levels tend to occur near the end of earnings season since executives aren’t allowed to buy or sell stock ahead of announcements, said Ben Silverman, director of research at Seattle-based InsiderScore.com. Sales of restricted stock awards at the beginning of the year may also be adding to the tally, he said.
“In general, insiders don’t buy the rally anyway,” Silverman added. “People sell for a number of reasons. You can only buy for one. The selling is not predictive in that respect.”
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