Insider Trading Trends: A Deeper Dive into Executive Stock Transactions

The Alarming Rate of Insider Stock Sales

In recent months, there has been a noticeable shift in the behavior of company insiders when it comes to their own stocks. The ratio of buy-to-sell transactions among top executives and large shareholders has dipped below its usual average. Historically, about 34% of insider transactions are buys, but in February, this figure dropped to just 24%. This trend is concerning because, during the early stages of the COVID-19 pandemic in 2020, insiders increased their buying activity, purchasing shares at an above-normal rate for five consecutive months. Similarly, during the late stages of the 2008 Great Recession, insiders also stepped up their buying. However, the current situation tells a different story. We’ve now seen ten straight months of below-normal buying activity, a pattern that stands out as unusual.

One might wonder why insiders are selling more than buying. A significant reason is that top executives often receive stock as part of their compensation packages, such as through stock options. This naturally leads to a higher volume of sells in the market. However, the recent trend indicates something beyond the usual compensation-related transactions. The sheer number of CEOs selling substantial amounts of their shares is raising eyebrows and creating an uneasy feeling among market observers. While it’s important to note that selling by insiders doesn’t necessarily signal a lack of confidence in their companies or the market, the scale of these transactions is something worth paying attention to.

The Million-Dollar Exodus: CEOs Selling in Bulk

A closer look at the data reveals some striking figures. From February 1 through March 5, CEOs at 197 companies sold stock worth $1 million or more. Among the most notable transactions:

• Nikesh Arora, CEO of Palo Alto Networks Inc. (PANW), sold over $275 million in stock in February and March. His total holdings have decreased from approximately 2.9 million shares in June 2022 to about 1.1 million shares. These sales were conducted under a predetermined plan, which allows for selling at specific intervals or price points.

• Jamie Dimon, chairman of JPMorgan Chase & Co. (JPM), sold $233 million worth of stock in February, representing more than 11% of his holding. Dimon, who had previously been a buyer during significant market downturns in 2007, 2009, 2012, and 2016, shifted to selling last year. His remaining shares are valued at around $1.6 billion.

• Eric Lefkofsky, CEO of Tempus AI Inc. (TEM), cashed in over $119 million in shares in February, which was about 8% of his holding. The company went public less than a year ago.

• Bahram Akradi, founder and CEO of Life Time Group Holdings Inc. (LTH), sold 31% of his shares in late February, generating about $150 million. Akradi, a triathlete himself, runs a chain of fitness centers.

• Jeffrey Tangney, CEO of Doximity Inc. (DOCS), sold approximately $75 million of his company’s stock in February, leaving him with about $135 million in Doximity shares. The company operates a digital platform for medical professionals.

These transactions, while not necessarily indicative of a bearish outlook by CEOs on their companies or the market, are certainly noteworthy for their scale and frequency. It’s crucial for investors to consider the potential reasons behind this trend, such as portfolio diversification or liquidity needs, but the overall sentiment seems to lean toward caution.

Energy Sector Bucks the Trend with Insider Buys

Amidst the broader trend of insider selling, the oil and gas industry presents a more optimistic picture. Here, executives are actively buying shares, seemingly confident in the sector’s future despite its current undervaluation. A few notable examples include:

• At Noble Corp., CEO Robert Eifler invested around $350,000 to slightly increase his holdings, which now amount to about $31 million at current prices. The company’s CFO, Richard Barker, also purchased approximately $223,000 worth of Noble shares in February, bringing his total holdings to around $7 million.

• Bradley Ehrman, CEO of Dorchester Minerals LP (DMLP), spent about $100,000 on partnership shares in early March. His total stake now stands at around $4 million. Dorchester Minerals collects royalties on oil-and-gas properties across 28 states.

• Joseph Foran, CEO of Matador Resources Co. (MTDR), made four purchases totaling about $632,000, increasing his holding to around $245 million. This is part of a trend where Matador insiders have been actively buying shares.

The energy sector is currently out of favor, and many believe the negative sentiment has led to overselling. These insider buys suggest a confidence that these stocks will rebound, with the expectation that these purchases will prove beneficial in the long run.

The Historical Record: Insider Transactions and Market Performance

Over the years, tracking insider transactions has provided valuable insights into market trends. This column has covered insider purchases and sales in 73 instances, with 63 of these columns spanning from 1999 to last year. The historical data offers some interesting observations:

• Stocks that were recommended to avoid, despite insider buying, underperformed the S&P 500 Total Return Index by a significant margin of 24.3 percentage points.

• Conversely, stocks where insiders were selling underperformed the index by 2.3 percentage points, indicating that insider selling can be a cautionary signal.

• Stocks that were recommended based on insider buying returned 9.1%, which, while positive, still trailed the benchmark by 1.3 percentage points.

• Perhaps most intriguingly, stocks where insider buys were noted but without a specific recommendation or with ambiguous comments outperformed the S&P 500 by 16.2 percentage points.

It’s important to note that these results are hypothetical and should not be conflated with the actual performance of client portfolios. Furthermore, past performance is not a guarantee of future results, and investors should approach such data with a critical and nuanced perspective.

A Personal Disclosure: JPMorgan Chase

As part of transparency, it’s worth disclosing that I personally own shares of JPMorgan Chase, in addition to holding them for most of my clients. This disclosure is crucial in maintaining trust and integrity in financial reporting, ensuring that readers are aware of any potential conflicts of interest that may influence the analysis or commentary provided.

Conclusion

The recent wave of insider stock sales across various industries is unsettling, yet it’s countered by hopeful signs in the energy sector where executives are increasing their holdings. While the historical performance data provides some guidance, it’s essential for investors to approach each situation with a critical eye, considering the broader market context and individual company fundamentals. The actions of insiders can offer valuable insights, but they should be just one of many tools in an investor’s decision-making arsenal. Balancing these insights with thorough research and a well-diversified portfolio remains the prudent approach for navigating the complexities of the stock market.