We've lost count of how many times insiders have accumulated shares in a company that goes on to improve markedly. The flip side of that is that there are more than a few examples of insiders dumping stock prior to a period of weak performance. So before you buy or sell International Business Machines Corporation (NYSE:IBM), you may well want to know whether insiders have been buying or selling.
It's quite normal to see company insiders, such as board members, trading in company stock, from time to time. However, rules govern insider transactions, and certain disclosures are required.
Insider transactions are not the most important thing when it comes to long-term investing. But logic dictates you should pay some attention to whether insiders are buying or selling shares. For example, a Harvard University study found that 'insider purchases earn abnormal returns of more than 6% per year.'
In the last twelve months, the biggest single sale by an insider was when the , Erich Clementi, sold US$1.8m worth of shares at a price of US$139 per share. That means that an insider was selling shares at around the current price of US$138. While we don't usually like to see insider selling, it's more concerning if the sales take price at a lower price. In this case, the big sale took place at around the current price, so it's not too bad (but it's still not a positive).
Happily, we note that in the last year insiders paid US$2.1m for 17964 shares. But insiders sold 39317.67 shares worth US$5.5m. Over the last year we saw more insider selling of International Business Machines shares, than buying. The chart below shows insider transactions (by individuals) over the last year. If you want to know exactly who sold, for how much, and when, simply click on the graph below!
The last quarter saw substantial insider selling of International Business Machines shares. In total, Kenneth Keverian sold US$940k worth of shares in that time, and we didn't record any purchases whatsoever. Overall this makes us a bit cautious, but it's not the be all and end all.
Another way to test the alignment between the leaders of a company and other shareholders is to look at how many shares they own. I reckon it's a good sign if insiders own a significant number of shares in the company. International Business Machines insiders own about US$106m worth of shares (which is 0.09% of the company). Most shareholders would be happy to see this sort of insider ownership, since it suggests that management incentives are well aligned with other shareholders.
An insider sold International Business Machines shares recently, but they didn't buy any. And our longer term analysis of insider transactions didn't bring confidence, either. On the plus side, International Business Machines makes money, and is growing profits. The company boasts high insider ownership, but we're a little hesitant, given the history of share sales.
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