Capital Markets

Insider Buying Falls to 12-Year Low

Corporate executives and directors are bearish on their own companies' stock.
Stephen TaubFebruary 9, 2005

In January, insiders bought a mere $34.1 million of their own companies’ stock, little more than a third of the $95 million for December, according to MarketWatch, which cited data from Thomson Financial.

The January number was the lowest since July 1993, when insiders bought just $26.3 million, according to MarketWatch. That month, however, insider purchases still accounted for roughly 5.5 percent of all dollars spent on insider-trading activity; in January 2005, purchases
accounted for a mere 1.8 percent of the total dollars spent by insiders.

Insiders are also less active judging by several other measures.

The total of 532 executives who purchased stock in January was down 37 percent from a month earlier, reported MarketWatch, and the purchase of fewer than 4 million shares represented a drop of 78 percent.

“We expected a month-over-month decline of some sort in keeping with the seasonal trend in each of the past 10 years,” noted the Thomson report cited by MarketWatch “However, the magnitude of the decline in buying was unexpected.”

Insider behavior is watched very closely because this group is generally considered the most knowledgeable about a company’s prospects. Insiders may sell for a number of reasons — to pay taxes, to diversify their portfolio, to make a large personal expenditure — but they buy for only one reason — they think their company’s stock is cheap.

As for sales: In January, insiders sold $1.9 billion of stock, way down from $4.1 billion in December, according to MarketWatch, which also noted that insider sales have slipped every year since 2001 in the December-to-January period.

Insiders should become more active in February, both as buyers and sellers, because company lock-up periods typically end after the issuance of December quarterly reports.

Indeed, in each of the prior five years, insider selling has increased an average of 76 percent between January and February, according to the Thomson report cited by MarketWatch. And last year during that time, buying activity rose 22 percent.