How to Think About Insider Selling
What is the perception of when insiders of a company like the CEO sell of x shares of stock but also exercise options? Is this seen as neutral since they are both selling and acquiring more shares and is this seen as just them taking a bit of profit with no material change in outlook on the company?
Their share ownership is both their options and common. It is still a sale, but definitely much less bite than with no offsetting exercise for their common position. Remember to think of the transaction also both in % terms of (1) their ownership and (2) shares outstanding.
They receive options as part of their comp package and once they vest/are in the money a lot of guys just execute them and then immediately sell the shares, in effect, turning the option into cash vs stock (given the same day execution and sale). There's really no read through on this because it is a wide-spread practice. If you wanted to try and get any kind of read, I think it is more telling when guys aren't selling shares.
I'm of the camp that its hard to read into sales, which typically have to be planned. People have expenses that need to be funded and why have you're entire net worth or majority tied into a single stock. That said, maybe if there is a patter of all executives selling and selling large blocks that might be something to read into. But individuals can sell for lots of reasons, new house, pay for college, remodel, other investments, etc.
On the other hand buys, especially when price has been hammered and its a decent amount being bought, at a minimum shows support. People generally aren't throwing good money after bad.
Thank you guys for the responses this helps a lot. So in general, really look out for when insiders are buying, selling can be normal if its not overwhelming selling/lots of execs selling.
What made me ask this questions was looking at insider selling of Moderna. It looks like there has been lots of selling as the company has gotten more valuable due to potential through coronavirus. It also seems like there have been execs exercising options but in general it looks like the selling has outweighed options exercises. Would this be seen as negative outlook by insiders? Since it looks like they're selling does this mean that insiders don't believe they'll be the first to a vaccine? https://www.secform4.com/insider-trading/1682852.htm
Also, there was another company i saw about a few weeks ago that was having a large run up in its stock but saw insiders were selling while exercising options at about the same amount. I'll try to remmeber out what company that was. I'm just looking to understand how investors should be thinking of these two examples in practice and if it draws on insiders' outlook/expectations
I advise plenty of insiders on their company stock, the news almost always gets this shit wrong. most all sales are predetermined based upon an advisor (like me) giving advice on how much they need to liquidate to ensure their family has some sort of fall back option in the event the company goes to $0. furthermore, options have expiration dates, so it could be a "use it or lose it" moment. finally, many of these preset plans have target prices embedded within, so it's often times out of the insider's control by the time sales actually occur. most insiders I know have such strict blackout windows they could almost never sell (especially within the C suite) if they waited for permission, so their advisors will tell them "hey, you've got $20mm in this thing, how about we just peel off $1-2mm a year but set a floor price so you're not bailing out at the bottom, capiche?" and very few executives would disagree with that. the good ones attempt to strike a balance between maintaining the vast majority of their equity ownership while still making prudent financial decisions for their families. yet, all the news reports is JOE BLOW SELLS 5 MILLION DOLLARS OF HIS COMPANY STOCK, not reporting that he announced it in a presser last year, he still owns 80%+ of the stock he had before the sale, and he has triplets who are all paying full freight at Duke.
here's what to watch out for: altering of predetermined selling plans and promptly selling (angelo mozilo did this before countrywide tanked). if someone is altering a plan and not allowing for a sufficient length of time to occur before sales happen, that's a red flag. fortunately, most brokers have rules to prevent this if the company's insider policies are lax, but it still happens.
finally, some of the time people are optimistic about the company, they may exercise options to hold the stock but have to sell some shares in order to pay for the options. so if a founder exercises $10mm of options but has to pay $2mm for the stock, it looks like he sold $2mm worth of stock, no bueno, but you're missing the signal, no one exercises and holds unless they're incredibly bullish about the stock.
This was just the explanation I was looking for. Thank you very much for making sense of this!
It’s common sense at the end of the day.
If you’re selling but also had offsetting exercises, well, you still had the option of not selling and letting more of your wealth ride on the future of the company. So I’m not as quick as some to ignore sales just because they weren’t net sales. Especially if company is supposedly really cheap at the time.
OTOH, there’s situations where a founder is engaging in net sales but people are losing their shit for no reason because these are tiny percentages of his overall holdings.
So to recap there are times when a zero net sale should be viewed with skepticism and times when a net sale shouldn’t. It’s all about the circumstances including things you might not know such as the individual’s wealth.
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