Companies Are Buying Back Stock as Executives Sell at Record Clip

Wasn’t 2007 just before the top of the previous bull market? Yes, and there’s talk the total could reach $1 trillion this year.

In light of the big jump in corporate stock repurchases, it is notable that executives at those companies are doing the exact opposite: dumping their shares at a record clip. Again, according to TrimTabs, corporate insiders sold $10.3 billion worth of stock in August. That’s the highest amount of selling in the month of August over the past 10 years, says David Santschi, director of liquidity research at TrimTabs. The previous high was $9.3 billion in August 2017.

“It’s picked up quite a lot in the summer,” he adds.

Meanwhile, in September, insiders bailed out of their own company shares to the tune of $7 billion, he says, topping the previous 10-year September high of $5.7 billion in 2012. TrimTab’s database includes all Form 4 Securities and Exchange Commission filings that officers, directors, and major holders must file.

So does this presage a market top? Not necessarily, Santschi says. It’s a dictum on Wall Street that insider buying is more meaningful than insider selling, particularly when it comes to an individual company. And, yes, this is compensation, so a certain amount of selling is to be expected.

That said, there are a couple of conclusions that come to mind. First, investors should note that managers appear to be saying one thing—that their companies’ stock is cheap enough to spend corporate capital on—but doing another, selling personal shares. In other words, there’s a little bit of cognitive dissonance. “Insiders are doing something differently with their own money than with shareholders’ money,” Santschi notes. It’s perhaps even more interesting to remember that many companies have borrowed to fund those big buybacks, thanks to artificially low interest rates.

Second, it behooves investors to follow the life cycle of corporate shares. Some market critics like to say that large corporations are cash-management machines for executives. In other words, companies buy back shares, put them into their treasury, and artificially boost earnings per share. Often, they aren’t all retired and a portion of them return to the pool of outstanding shares via executive stock compensation.

Whether insider sales on a broad level predict weaker aggregate stock returns has been debated for decades, notes Paul Shea, strategic economist at Miller Tabak, a market research and wealth-management firm. The best recent studies, however, show that insider sales do predict worse returns, and investors should thus be concerned by this development, he says.

To be clear, Shea adds, there is no evidence that even these elevated levels of insider sales suggest a significant upcoming drop in stock prices. Yet it’s one metric that, more often than not, is followed by abnormally lower returns in stocks at the broad-market level.

Investors should expect upcoming returns for about the next 12 months to be “several percentage points below” the S&P 500’s historic inflation-adjusted average annual return of 7.2%, he says. Other indicators, including the spread between dividends and three-month Treasurys, and current monetary policy, also suggest weaker than usual returns, Shea says.

These days companies are flush with cash and the economy is roaring, but it might be better to watch what insiders do than listen to what they say.

Write to Vito J. Racanelli at vito.racanelli@barrons.com