By Agnes Grunfeld
Neither share repurchases nor insider sales necessarily point to hidden risks at public companies. Under certain circumstances, corporations can legitimately buy back attractively valued stock, and insiders can realize gains on their holdings of company stock or just diversify their positions. At other times, both buybacks and insider sales can serve more troubling goals. Sometimes, companies use stock buybacks to artificially boost earnings per share and, indirectly, executive compensation. Sometimes, sales of shares by insiders can signal genuine pessimism about business prospects.
So, repurchases and insider sales do not, in isolation, conclusively reveal risks worthy of closer scrutiny. But the co-occurrence of significant buybacks and insider sales raises a tougher question: If the repurchase truly reveals the management team’s conviction that the market undervalues the company’s stock, why would insiders sell stock at the same time?
Of course, a case-by-case analysis may yield reasonable answers, but investors should at least consider the possibility that the appearance of conflict stemming from the simultaneous buying and selling of stock may not be entirely benign. One more jaded explanation may be that the insiders’ interests are not aligned with the interests of other shareholders when the insiders take advantage of the price support a repurchase program offers to sell their own shares.
Last Friday, The Wall Street Journal cited our recent research on the co-occurrence of share repurchases and insider sales. In today’s report, we included a fuller list of 43 U.S. companies with market caps of more than $1 billion where there has been substantial insider selling as well as share buybacks over the past 12 months. Again, we do not claim to have uncovered a smoking gun, but the list that follows may indeed help investors identify companies whose insider sales actually reflect insider pessimism and whose share repurchases may be motivated by a desire to prop up market prices.
Download full report.