Corporate insiders are selling with one hand what they're buying with their other.
In their personal accounts, they are selling shares of their companies at near-record rates. With their companies' cash, in contrast, they are repurchasing shares at a record rate. This schizophrenic behavior doesn't bode well for the market.
Insiders' stinginess when it comes to their own money is illustrated by data compiled by InsiderSentiment.com, a website maintained by Nejat and Jon Seyhun. The former is a finance professor at the University of Michigan and one of academia's leading experts on interpreting the behavior of insiders. The latter is an analyst at InsiderSentiment.
Among all companies with any insider transactions so far in October, just 13% have experienced more insider buying than insider selling. That's the lowest insider buy ratio in at least a decade, according to the Seyhuns' analysis.
Consider Nvidia. Over the past three months, insiders have sold more than $700 million of the company's stock and bought none, according to Yahoo Finance data. Yet the company is in fifth place in a ranking of companies based on the greatest dollar amount of repurchase announcements this year, according to Jeffrey Yale Rubin, president of Birinyi Associates.
In contrast to the insiders' stinginess in their personal portfolios is their eagerness to purchase their companies' shares with corporate cash. Rubin told Barron's that based on year-to-date buyback activity, corporations' announced buybacks have now exceeded $1 trillion and that "by the end of 2024, announced buybacks for the year will set a new record."
This contradictory behavior hasn't been the norm over the past decade. Since 2014, there has been a rough correlation between insiders' behavior in their own portfolios and moves made with corporate cash. Their recent behavior is unusual and deserving of closer analysis.
The insiders' implicit divergent messages can't both be right, needless to say. Winston Chua, a liquidity analyst at EPFR, a leading provider of fund flow data, says that "if I had to bet which will prove to be correct -- the bullish message of corporate repurchases or the bearish message of the insiders -- I'd bet with the insiders." Prof. Seyhun concurs.
There are several reasons to agree with their assessment. One is that corporations historically have been poor market timers with their repurchase decisions. "Most buybacks are 'buy high' situations," Rob Arnott, founder and chairman of Research Affiliates, said in an email. Even if we didn't know that insiders with their own money were such heavy net sellers, therefore, the record pace of recent buybacks would be a source of concern.
In contrast to the poor market timing exhibited by companies' repurchase decisions, insiders historically have been more right than wrong in the timing of their personal purchases of their companies' shares. Prof. Seyhun has found from his research that the insider buy ratio has one of the best track records when forecasting the market's 12-month return -- superior to many better-known valuation indicators.
To be sure, the insiders as a group have been pessimistic for more than a year now and, at the same time, corporations have been aggressively buying back their shares -- and yet the stock market has continued ever higher. While that might incline you to bet on the bullish message from repurchases rather than the pessimistic message from insiders, such a bet extrapolates the recent past and ignores the much longer history that suggests the contrary.
The Seyhuns write that "recent insider selling...is looking like the beginning of a larger pattern of indiscriminate insider selling."