By Michael Kaye, CFA
While many investors like to track share purchases by corporate insiders -- officers, directors, and key employees -- for their own accounts (see BW Online, 6/27/03, "Following the Inside Track "), it may also make sense to keep tabs on when those people are selling.
The reasoning: If insiders are doing more selling than buying, it may indicate that they believe the outlook isn't all that great. After all, if a company's prospects were favorable, they should be snapping up the shares. (Of course, some instances of insider selling may be dictated more by an individual's financial needs than any desire to bail out of the stock.)
Using information gathered from Securities & Exchange Commission documents, market-data provider CompuStat tracks the buying and selling of shares by the top 10 individuals -- based on the number of shares traded -- having an insider relationship with a company.
We used CompuStat's data to screen for companies where the transaction values of insider sales over the last six months exceeded those of insider purchases in the same period by a ratio of at least 10 to 1 (transaction values are derived from the number of shares bought or sold multiplied by the prevailing purchase or sale price at the time). This is usually a negative sign for the immediate-term future for the company's share price, as a ratio that high may be an indication of strong negative sentiment on the part of company insiders.
Then we used one final filter to help make the case that the stocks on the list have poor prospects. We looked for outfits with a ranking of 1 STAR (sell) or 2 STARS (avoid) from Standard & Poor's equity analysts. Stocks with those designations are expected to underperform the market over the next 6 months to 12 months.
When we ran the numbers, eight names emerged:
Kaye is a portfolio services analyst for Standard & Poor's