These Executives Are Telling You To Sell

by: Brian Nichols

The most important factors in buying a stock are widely debated. Some place more emphasis on technicals while others trade on fundamentals. The most successful investors use a wide range of indicators to better understand a company and its future performance. Insider trends are an indicator that is not used enough by investors to determine future performance.

Very rarely do I hear an investor talk about the trading patterns of insiders buying or selling. Yet the trends of those within the company may be your greatest indication of future performance. Below is a lesson to be learned regarding insider trading by showing three different examples of stocks that fell shortly after insider trading and how investors can use this action to determine the trend of a stock.

I consider myself to be a realist, I like to think I have a great deal of common sense and I translate these traits into investing. So let me ask you a question: If you were a CEO of any company that is publicly traded would you buy shares before a horrible earnings announcement? If you want to flip the question would you buy shares in your company before an exceptional earnings report?

And while there are many laws in place to avoid unfair trading we would be lying to ourselves if we said that it does not occur. I am not insinuating that executives or insiders are breaking any laws. But we would be kidding ourselves to say that executives of a company are unaware of what's coming before it arrives or that there is a fair trading platform between an investor and the CEO of the company.

It's no crime for executives to reward themselves for building a large company and returning large gains on an initial investment. But sometimes an insider will sell a large number of shares just before the stock trends lower. Below is a chart that show three different executives at three companies that have sold a large number of shares in a short period of time. Each situation with each executive tells a different story therefore let's look at the selling and the aftermath of each stock.

Insider Selling

Ticker Executive Dates Shares Value Avg. Price Current Price
GMCR Lawrence Blanford 8/16 - 10/18 135,000 $13,106,699 $97.08 $70.99
NFLX Reed Hastings 6/2 - 10/6 95,000 $21,864,899 $230.15 $84.14
TZOO Ralph Bartel 4/26 - 6/15 2,436,518 $186,536,037 $76.55 $33.28

If investors would have taken profits with the executives then there returns would be much higher to date. Each stock is significantly lower than the average price when each executive sold his shares. And while this may frustrate some investors I view each executive selling shares as a different situation. Lawrence Blanford rarely sells shares, in fact he only sold shares one other time this year. Therefore the fact that he sold on three occasions for more than $13 million should have been a red flag to investors.

I find it very ironic that he sold shares just before the strong selling of its stock. And it may mean nothing but on the other hand it could have several meanings: maybe the SEC found a red flag and he knows there will be actions taken against his company for accounting issues, maybe the company is not meeting expectations, or maybe he sold because the stock trades high above its earnings and he felt as though it was a good place to take profits.

We really don't know why Blanford sold his shares, all we know is that he doesn't sell often and that he sold just before a negative outlook regarding the company's future became public. Either way I believe that if investors would have taken notice that Blanford had been selling a large portion of his shares then maybe it could have served as an indicator and saved a large amount of investors from losing a portion of their investment.

Reed Hastings has been selling 5,000 shares on a fairly consistent basis for the last two years. Therefore it would have been difficult for investors to notice a trend or that by Hastings selling shares that it could insinuate trouble for the company. The stock has since fallen as the company's momentum has changed directions. And much of this downfall has been the result of Hasting's decisions which he has admitted.

I believe Hastings has sold shares because of how high the stock was trading above earnings and that he saw value and returned significant gains. I don't believe there is anything wrong with him selling 5,000 shares a month yet investors should wonder why an executive is always selling but never buying.

The situation with Ralph Bartel and Travelzoo should have been a massive indicator for investors that it was time to take profits. At the time that Bartel was selling his shares TZOO had returned one year gains of 300% and was by all measures a momentum stock trading much higher than its earnings. And I must admit I too fell into the price trap of TZOO and although I believed and still believe it's a great company the stock was significantly overvalued.

Travelzoo is growing at an incredible rate but at $70-$100 a share it's overvalued. There is simply no reason that TZOO should have a $1 billion market capitalization when it's yet to post earnings of $10 million during a quarter. I believe that Bartel realized this fact and made a smart business decision and capitalized on its high valuation. The only problem was that executives at TZOO were giving interviews and appearing on Mad Money telling investors that there were no problems and that the company was growing as fast as it possibly could. Yet the company missed guidance the following quarter which caused a free fall in its stock, but not before Bartel sold nearly 2.5 million shares for an average price of $76.55.

The lesson to be learned is that investors should pay attention to the selling tendencies of executives. As investors we are given various tools to work with; we are given guidance, previous earnings, sometimes we get monthly sales, and updates regarding product progress. However we don't know the ends and outs of the operations within a company regardless of how much information is provided. Therefore investors must place the same level of importance on insider trading as quarterly earnings reports, and know the trends of executives that are selling shares.

When Reed Hastings sold shares it meant very little because he sells shares so often, but when Bartel sold nearly $200 million worth of shares during a two month period we should have realized its meaning. There is no way to justify this level of insider except that he knew the stock was overvalued and took profits.

Those who occupy Wall Street are fighting the inequality of wealth between the rich and poor. They have struck a cord with a large percentage of Americans by identifying themselves as the 99%. When we look back on the executives that sold the most shares during the last year we would most likely find that the stock is much lower. And although some people may believe it's unfair for CEO's to sell their shares at this level, which negatively impacts the price of the stock, it's still there decision as investors.

I believe that those who occupy Wall Street are making good points and may even make a difference but some of the issues they are protesting are outside out there control. It's a proven fact that the separation between the rich and poor is growing larger and that companies have more cash than ever before. It's also a fact that CEO's are making more money than ever before yet are laying off employees. These issues don't seem right and several of these facts are negatively impacting our economy.

And insiders selling shares before the stock drops is just another example of what those who occupy Wall Street are protesting. Yet I believe that people are wealthy for a reason, and unless they have a trust fund from birth, they are rich because they made good business decisions or have a talent or skill that is valuable. And while these talented individuals may not make the best decisions to help the economy it's not their responsibility to worry about overall employment but rather the health of their respective companies.

I like to think that I view the economic issues in this country with both eyes wide open yet there are many who would disagree with my beliefs. It's a very sensitive subject for the millions of Americans who are struggling to pay bills or feed their families while executives are compensated millions of dollars and take from the "little man". Insider selling is an issue that we can not change and it will always be a system that allows the rich to become richer while taking from the investor with less cash flow. However it doesn't help to complain about the problems but rather to learn from the issues and make changes to avoid getting financially burned.

Each of the three companies that I have mentioned were showing no signs that the stock would fall, by such a large margin, at the time that these executives were selling shares. If you would have looked at the income statements and balance sheets of these companies you would have been impressed at the overall growth within each company. Therefore investors will sometimes ignore when executives begin selling shares because we can't see problems at the surface. And sometimes an executive selling shares means nothing; such as with Hastings because he sold on a consistent basis.

But other times it can mean an issue is on the horizon; such as with Bartel or Blanford who sold a large amount of shares just before the stock fell. To avoid losing your money learn how to identify patterns with insider trading. Because history tells us that a large volume of insiders selling could mean that trouble is on the horizon. Finally, I have posted a chart below of two fast growing companies that appear to be growing larger. However these two companies have both had strong insider selling over the last few months and while no problems appear to be present within either of these two companies there did not appear to be any issues present within any of the three companies above when insiders were selling shares so ferociously.

Ticker Executive Dates Shares Value
GOOG Lawrence Page 7/8-10/12 27,778 $15,319,000
GOOG Sergie Brin 8/2-10/4 83,334 $40,964,000
CRM Graham Smith 8/29-10/24 33,200 $4,233,527

Disclosure: I am long GOOG.

Additional disclosure: Insider trends can be viewed on Yahoo, CNBC, etc. As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.