Why You Should Worry About Insiders Selling Stock as Stock Buybacks Explode
Corporate insiders are selling stock at increasing levels this year ($17.5 billion in May and June, according to TrimTabs Investment Research). As the same time corporate buyback announcements are at record levels, averaging $5.1 billion daily this year, far greater than the previous record of $3.2 billion daily in 2007. Is this a case of insiders violating their fiduciary responsibility by using corporate cash to enrich themselves by engineering stock price increases and artificially boosting earnings via buybacks? That’s a question the SEC is asking. What’s also worrisome about this phenomenon is that the insiders who are selling could well be signaling they have little confidence in future earnings growth. Which is why large insider selling often is a contrarian signal; and buybacks a temporary bandage. Take Harley Davidson (HOG), which used a debt offering to buy back stock. It didn’t work. Its stock has dropped 20% amid fiscal disarray, and more recently retaliatory tariffs from the European Union.
I’ve never understood why this practice is even legal. It’s almost as bad as the “legal”insider trader that Congress gets away with. How can a company claim its stock is cheap and buying it is the right thing to do for shareholders while insiders are selling?
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