Corporate Insiders Dumping Stocks – Should You?

Much of the compensation corporate executives receive comes from stock and options. That compensation mix is intended to align the interests of the executives with the interests of the company’s shareholders. It’s not unusual to have company execs make routine stock trades, both buying and selling. Sometimes executive stock trades are limited to a certain number of trades in a year, limited to trading on specific dates, or otherwise regulated both during and after employment. Stock trades by execs are typically scrutinized by regulators to make sure those execs aren’t dumping stock because they know the company’s about to announce a poor quarter. Enriching themselves at the expense of everyone else is called insider trading and it’s a serious charge.

All the same, those people got into those executive positions by being able to see the larger trends at work in the economy. So when corporate insiders across a number of different sectors all start selling stock at the same time, that’s something that small investors might want to consider.  As prices are soaring, and TV pundits insist the markets are in great shape, corporate insiders are grabbing their money and getting out.  Here are some reasons why.

Stocks Are Really Expensive

Comparing stock valuations to historic averages, stocks are at the high end of the price range right now. Stocks are evaluated by a metric called the Price to Earnings Ratio or P/E. Using estimated future earnings to calculate that number is called a forward P/E. A comparison with the forward P/E from days past shows that stocks are at the very upper end of their historic price range. Of course, it should be noted that any market making a new high is going to appear to be expensive compared to historical metrics.

Corporate Debt is Surging Higher

Companies borrow money for a lot of good reasons. They might borrow to make payroll, in order to smooth out personnel expenses; they also borrow to build new factories and commercial space and to buy new machinery. Unfortunately, the motives for borrowing are not always so constructive. Companies stashing cash in overseas subsidiaries borrow against that cash as a way to skip out on paying taxes. Companies have also started borrowing money in order to pay the insiders and stockholders outsized dividends. Debt isn’t all the same, but regardless of the cause that money still has to be paid back. Corporate borrowing is leveraging earnings for years into the future in some cases. That’s fine when the economy is rolling but what happens when the bill for that debt comes due at a time when the economy isn’t doing so well?

Too Late to Time the Market?

If you’re in your forties or fifties, you may not have time to ride out another down market before you want to retire. Consequently, if you’re a bit more seasoned, this may not be the best time to be putting additional money in the stock market.

If you haven’t rebalanced your portfolio in a while, adjusting your asset mix to optimally coordinate with the time you’ll begin needing to access those funds, both your regular investments and particularly in your retirement accounts, this is a good time to do it. Rebalancing is not market timing, it’s skimming profits from asset classes performing well and putting the money into assets that offer greater upside potential, particularly for the long term.

Diversify Your Holdings

Rebalancing is also your opportunity to diversify your holdings. Take profits from the stock market and plow them back into other investments like municipal bonds and liquid hard assets. Hard assets give you a hedge against the buying power of your cash; while municipal bonds don’t go to execs padding dividends, but are direct investments in city transportation and infrastructure improvements.

By rebalancing at least once a year you’re lowering your exposure to equities when prices are high and broadening your investment base. That makes periodic rebalancing one of the keys to disciplined investing. Systematic and disciplined investing will mean a lot fewer headaches as you get older and need your money in retirement.