Insiders—company executives and directors—buy and sell shares all the time. Buying your own stock can be a perfectly legitimate way of using spare cash, of course, and it can also be used to prettify a bottom line by boosting earnings per share.
But large insider sales such as those seen last year at Facebook (FB) and Microsoft (MSFT) make the market skittish. And when selling coincides with company-sponsored share buyback programs, it raises suspicions that companies are buying back their own directors’ and managers’ shares.
Recent data from research firm TrimTabs indicates that U.S. companies announced share repurchases of $725 billion in 2015, second only to the $810 billion notched in 2007.
While TrimTabs is not predicting that 2016 will see another financial crisis like the one in 2008, this level of stock buyback activity is often a predictor of stock underperformance. In fact, according to the S&P Buyback Index—designed to measure the performance of the 100 stocks with the highest buyback ratios in the S&P 500—performance at buyback companies was poor in 2015. The Buyback Index was down 6.8% in 2015, compared to a less than 1% decline in the general index.
“[The use of] financial engineering such as buybacks to achieve growth tends to suggest that the best years are over for a company and that it is late in the cycle of its success,” says TrimTabs CEO David Santschi.
According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, the tech sector—which fared relatively well in 2015—was the biggest repurchaser of its own shares last year. (The stock buyback data used below covers the first three quarters of 2015.)
Apple (AAPL) continued to lead the buyback pack with $13.3 billion spent on share repurchases in the third quarter, following $10 billion repurchased in the second quarter. Apple’s stock buybacks are part of a dividend and share repurchase program announced in March 2012, which initially was slated to buy back $45 billion over three years but then was expanded to $100 billion in 2013.
The fact that Apple’s repurchase program is the largest in history could be cause for concern. The company may be flush with cash, but when a CEO decides that repurchasing company shares is a better use of capital than investing in the future, it is a clear warning sign. On a brighter note, Apple’s insider selling, at around $300 million, was not in the league of other tech companies such as Microsoft and Facebook.
Microsoft (MSFT) came in second in the share buyback table, with $4.8 billion repurchased in the third quarter, on top of the $4.3 billion it bought back in the second quarter. Again, like Apple, this was part of a multi-year repurchase program designed to buy back $40 million worth of shares by the end of 2016.
Most of Microsoft’s enormous insider selling—$2.5 billion in 2015—can be attributed to Bill Gates’ multi-year divestment program. He sold around $1.5 billion last year, down from more than $3 billion in 2014. That leaves the suspicion that part of Microsoft’s buyback program is designed to buy the shares that Gates and other insiders are selling.
“Although [Microsoft] initially had a good run with [CEO Satya] Nadella, growth is declining and this level of buybacks combined with insider selling is concerning,” says Santschi.
Facebook (FB) is too young a company to engage in stock buyback programs, still preferring to use spare cash to reinvest in the company. But its insider selling was spectacular last year, reaching $1.1 billion. (The figure does not include any of the shares that CEO Mark Zuckerberg announced he was selling for charity.) Santschi said it was precisely because Facebook was doing so well last year that insiders sold, but that calls into question how much growth they believe is left in the company.
The insiders selling included director Marc Andreessen, an early Facebook backer who sold the vast majority of his powerful voting shares, as well as Jan Koum, director and WhatsApp founder, who sold the entire first tranche of shares he was awarded upon joining the company. Selling accelerated at the end of 2015, when Facebook’s stock price began to falter.
Apple (AAPL), Microsoft, and Facebook declined to comment for this story.
Many of the insiders selling stock did so as part of planned sales. In the case of Bill Gates, these sales were announced far in advance of the actual sale dates. But in the majority of cases, it is impossible to confirm when the sales were planned because this information is not made public. According to the SEC, there is no hard rule that sets a minimum notice period between planning the sale and executing it. The only test is whether you are in possession of “material non-public information” when the decision is made. Such information is very narrowly defined, and does not include opinions that growth has run its course and it’s time to get out.
When alone or combined with stock buyback programs that take the place of investment in growth and new products, insider selling at this level may not bode well for the fortunes of these companies’ public stockholders.