C-Suite Buy of the Week: Discover What Insider Selling Patterns Mean for Your Investments

Most of the time, we ignore insider selling. Insiders can sell for a host of reasons, such as estate planning, life changes, and liquidity needs.

At younger, fast-growing companies, insiders are much more likely to be sellers, as insiders cash in returns on their initial investments in the company.

A stock sale by a corporate VP who needs a few hundred grand to pay his kid’s Harvard tuition bill has little to do with the company’s future expectations.

Academic research and practical experience demonstrate that insider or open market purchases are more important than insider selling.

There is, of course, an exception to the rule. When we see a group of insiders selling stocks near 52-week lows, there is valuable information to be gained. It is highly unlikely that they all needed cash for tuition or a dream home at the same time.

Unless several insiders had an emergency need for cash simultaneously that was so dire they would sell a stock at a low price, an insider selling cluster near the lows tells us something important.

In the immortal words of Sherlock Holmes, “The game is afoot!”

Something is happening at the company that has several insiders of the opinion that they need to sell now, as a higher price is unlikely to be in the cards for the foreseeable future. Something has gone wrong, or the company’s product is falling out of favor.

You and I may not be able to determine precisely what is bad, but the combination of weak price action and insider selling clearly indicates that something is amiss.

That appears to be the case at Constellation Brands STZ. While its core products rarely go out of demand, shares of the beer, wine, and spirits company have been extraordinarily weak over the past year. Insiders have been selling as the stock price declined.

Did insiders know or suspect the Surgeon General would announce the need for a cancer warning on alcohol bottles?

 Is there some shift in the public’s desire for intoxicating beverages? We do not know. The Securities and Exchange Commission requires that insiders announce transactions.

They do not require them to provide their reasoning.

We do know that sales growth has been slowing, earnings are falling, and Wall Street analysts have been lowering their estimates for the next year. If insiders saw some light at the end of the tunnel, we would expect to see some buying.

We have not.

 Instead, we have seen a steady stream of sales from the company’s top executives, including the CEO.

The stock could reverse course and go higher. That would not be the smart play until insiders express their belief in the future with their cash.

We are also seeing a cluster of insider selling in stocks that have dropped close to the 52-week lows in the same industry.

The odds of executives and directors at several companies in the same industries all having immediate cash needs are so small that this grabs my attention.

We know that there is a shortage of houses in the United States. With a 4% average rate for people with a mortgage and more than half of all homes owned by folks over 55, a massive shortage of existing home inventory has developed. It is not going to change anytime soon.

That should spell boom times ahead for builders, but that has not developed yet. While we may see more activity in 2025 than in 2024, it will still be well below the historic average of building activity.

As we start the year, there is a lot of uncertainty about the economy and interest rates. Mortgage rates are highly unlikely to return to 2021 levels, and there is a whole generation of buyers that are struggling to wrap their heads around the new normal.

Some builders may be talking about great earnings for the year, but we are seeing many insiders quietly selling stock to tuck some cash away for a rainy day. They are selling despite recent price weakness.

 Dream Finders DFH, Hovnanian HOV, and Landsea Homes LSEA have seen clusters of selling near the 52-week lows in the last few months.

I am a big believer in the eventual boom cycle for homebuilders.

Either that or we become a nation of renters like we were before the GI Bill and 30-year mortgage created the modern American dream of the house with two cars in the garage, a white picket fence, and a homeowners association that would make Stalin blush with envy.

Right now, industry fundamentals are uneven, and insiders are less than enthusiastic. When we see a cluster of insiders buying at several homebuilders, it will be time to be enthusiastic buyers. That time is not now.