Insider stock sales raise red flags

NEW YORK -- Talk about a double standard. While corporate leaders tout the benefits of investors owning their stocks, many executives seem to be running for the doors themselves.

Selling of shares by insiders -- which includes executives and other top officers and directors at a company -- has been rampant in recent months, with sales rising to their highest level in more than four years in November.

While no one can pinpoint an exact reason for that run-up, the implication is troubling since big insider selling is often considered bearish for the overall market as well as for individual stocks.

Of course, not all insider selling should be construed as a bad sign. Some stock sales may just be routine or may be executives wanting to free up money to cover personal expenses or to help pay the taxes on shares they buy after exercising options. And in some sectors, namely technology, stock compensation is often the bulk of executive pay, so they sell their stock for income.

In addition, November has historically been a busy time for insider selling. That's because it comes after most companies have reported their third-quarter earnings and restrictions for selling have been lifted. In addition, some executives sell in November for tax purposes.

Still, insider-trading trackers at Thomson Financial say the recent selling bonanza is "particularly noteworthy."

Some $6.6 billion in insider stock sales took place last month, the highest level since the $7.7 billion in sales tallied in August 2000, according to Thomson. Contrast that with the $144 million worth of stock that was bought by insiders last month.

The most selling came from in the financial sector, where executives sold $882 million of their own stock in November, and health care companies, whose insiders sold $734 million worth of shares. Selling in both sectors was double the five-year monthly average, according to Thomson.

On a company-specific basis, consider what has gone on at networking company Avocent Corp., where company statements seem to contradict insiders' actions. On Nov. 1, the company announced a buyback plan for up to two million shares and said in a news released that the purchase of the stock "represents a solid investment for our shareholders."

Apparently, the company's insiders seemed to have ignored that memo. In the month following the announcement, they sold 578,565 shares out of an aggregate of 645,756 insider shares sold during the last 12 months, according to Vickers Weekly Insider, a newsletter that tracks trading by company executives.

There was no buying during that time period.

To be fair, much of the selling came as executives exercised their stock options, not surprising given that its shares have climbed 30 percent in the last two months reaching their highest level since last winter. In addition, the company's officers were blocked from making stock transactions from December 2003 through April of this year because of Avocent's acquisition of OSA Technologies Inc., according to vice president and chief accounting officer Edward Blankenship.

Yet, as Vickers editor David Coleman points out: "If they thought the stock would continue to climb, wouldn't it be in their interest to hold on to it rather than immediately get out?"

Looking beyond companies where executives say one thing but do something else, Coleman points to other warning signs that investors should use to gauge potentially negative signs associated with insider selling. He suggests looking out for insiders who have sold their stock at times that don't coincide with when they exercise options, or those who sell above and beyond the amount that they have exercised.

Sometimes, though, investors refuse to heed such warnings.

Take, for instance, the surge in shares of homebuilder NVR Inc., which has seen its stock jump from just over $432 a share at the start of the year to now trade about $730 apiece. That rise has come despite expectations for a slowdown in the housing market as interest rates begin to climb.

Also troublesome with that giant stock run-up is that NVR's insiders have been bailing out of the stock big time. They have sold more than $220 million in shares this year alone.

Among those selling: NVR CEO Dwight Schar, who hasn't purchased any stock since June 2002, only exercised just over 83,000 shares this year and has sold about 265,000 shares at a market value of about $155 million, according to Thomson. The company declined to comment on its insider selling, said NVR spokesman Dan Malzahn.

At least so far, NVR's investors have ignored the insiders' moves, and haven't been hurt by that decision. Whether that luck continues will surely be tested in the months ahead.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck@ap.org