The stock sales and purchase patterns of public company insiders have long been of interest to investors and those trying to assess a company’s financial future. 
In the traditional view of insider activity, when the officers and directors of a company are buying, it signals that the business is on a successful path.

Indeed, when we look at BlueLinx Holdings (BXC: NYSE), which is 73% owned by insiders, we see that the company’s officers and directors have been net buyers over the past two years. This certainly speaks to their optimism regarding the company and the industry. 

Extenuating Circumstances

So what about businesses where the insiders are selling? Does this selling activity always indicate a negative view of the company and, therefore, the industry? The short answer is no.

The financial needs and selling activities of corporate insiders can’t be summed up by time-worn investor adages. For many executives at publicly traded companies, stock grants represent a significant portion of their income. This means that when needs arise for large sums of cash, the only source of that liquidity is the sale of stock. Other executives, nearing retirement, may wish to reduce their single stock risk by investing in a more diversified portfolio. 

So it’s important to take into account the extenuating circumstances around an insider sale. Most insiders are continually granted additional stock options. In such cases, the difference between shares sold and the shares included in additional options granted yields the true net amount of shares sold.

This calculation is key to understanding insider selling at companies such as Huttig Building Products (HBP: NASDAQ). Backing out the number of options granted to insiders during the past two years, most of the net insider selling activity represents a relatively small percentage of overall insider holdings. This probably means that executives’ specific reasons—not a negative feeling about the company or industry—brought about this selling.

Many insider sales are described in Securities and Exchange Commission filings as automatic sales. Under such sales, an executive makes plans in advance to sell a certain number of shares on a given date. This prevents problems with quiet periods, discourages insider trading, and allows the executive liquidity. Even sales that aren’t automatic can represent prior plans for liquidity, as appears to be the case at Stock Building Supply (STCK: NASDAQ). 

The identical timing and share amounts of recent sales by officers, and the private equity fund that took Stock public, indicate a group utilizing an IPO to eventually achieve liquidity, rather than selling based on company or industry prospects. All in all, insider selling activity shouldn’t be taken as a statement about our industry as a whole without additional examination.