Corporate Insiders Not Optimistic About Market Recovery

U.S. stocks have been on sale recently, but corporate insiders aren't finding many bargains.

The average ratio of companies whose executives or directors have been buying stock versus selling has dropped for six consecutive months, according to data from InsiderSentiment.com. This is the longest such decline in almost two years.

Insiders typically have greater insight on the business outlook, and the fact that they haven’t been scooping up their own stocks as the market tumbles suggests they believe that it might not have bottomed just yet. The S&P 500 has fallen 18% in the past year, and last set a record a year ago.

According to researchers, corporate insiders tend to time their transactions well. They bought shares of their own companies when markets sold off in March 2020, and they were rewarded with a rally over the rest of that year. In November 2021, when Federal Reserve Chairman Jerome Powell indicated that the central bank would soon begin raising interest rates, insiders sold their shares en masse.

The ratio of insider buying to selling increased slightly last year when stocks hit their summer lows, but it has been trending downward since then. If insiders continue to stay on the sidelines, that could indicate more trouble ahead for the stock market, strategists say.

Nejat Seyhun, a finance professor at the University of Michigan who studies corporate-insider activity, noted that the lack of buying activity despite falling prices is a warning sign.

Tesla CEO Elon Musk was the biggest insider seller last year, unloading nearly $23 billion in shares, according to Washington Service. Musk's massive sales came as he was raising cash to finance his $44 billion acquisition of Twitter.

In December, Mr. Musk pledged to pause his sales of Tesla shares for at least 18 to 24 months, in an effort to ease investor concerns that his purchase of Twitter was to the detriment of the car maker. Since Mr. Musk's most recent share sales concluded on December 14, Tesla shares have declined by 28%. They declined by 65% in 2020.

Other notable sales by insiders included those by Walmart Inc. heir Rob Walton, who sold through the Walton Family Holdings Trust; former Constellation Brands Inc. Chief Executive Rob Sands; Airbnb Inc. co-founder Joe Gebbia; and Alphabet Inc. co-founders Larry Page and Sergey Brin, according to the Washington Service. All sold at least $895 million in stock over the course of 2022.

The largest seller among other CEOs was Gary Rollins of pest-control firm Rollins Inc. Mr. Rollins, who stepped down at year-end, sold $506 million in shares over the course of a year when his company’s stock greatly outperformed the S&P 500, rising 10%. Moderna Inc. CEO Stéphane Bancel followed, with $504 million of sales. Moderna shares dropped 29% last year.

Dustin Moskovitz, co-founder and CEO of software developer Asana Inc., led all insider buyers with $921 million in purchases over the course of the year. Mr. Moskovitz said on a September earnings call that he was investing in Asana because he believes “the market opportunity is enormous” for the firm’s work productivity software.

According to InsiderSentiment.com's analysis, the small-cap healthcare, industrials, and consumer-staples sectors are seeing increased insider buying activity. These segments are traditionally considered defensive sectors that can withstand a recession.

Many insider sales are made on predetermined schedules to avoid the appearance of impropriety. However, the comparative lack of buying right now stands out, strategists say. This is especially true as traditional valuation measures show U.S. stocks getting cheaper.

The S&P 500 is currently trading at around 17.9 times earnings over the past 12 months, according to FactSet. This is down from a multiple of 25 a year ago and the five-year average of about 23.

According to data from the Washington Service, in both November and December, almost twice as many companies had insider selling than insider buying. This is inline with the average since 2017. October was an outlier month, however, with 601 companies having insider selling and just 219 with insider buying.

Insider selling totaled $17.1 billion over the past three months, compared with purchases of $1.3 billion. While analysts tend to look more closely at the number of buyers and sellers than dollar amounts to deduce sentiment trends, the large number of sellers can still have a significant impact.

Mark Hamilton, chief investment officer at Hirtle, Callaghan & Co., said that the forces keeping insiders from buying now are likely similar to what is keeping other investors out of the market.

Many investors are hesitant to call a market bottom while the Federal Reserve continues raising interest rates. Like many corporate insiders, institutional investors have largely bailed on stocks and turned to more-defensive investments.

"People tend to have negative sentiment, and insiders are just as likely to be affected by that," Mr. Hamilton said. "People have suffered losses, and that creates a psychological barrier that makes them reluctant to buy when prices are low."