Be Careful With The Buybacks

One of the more popular conversations lately has been that of companies buying back their own common stock and whether or not that is an indicator of future prosperity. When insiders buy or sell stock, it is made public, usually by Form 4 or something close to it. The analysis of insider buying and selling is easily tracked on most financial websites. For example, the people that run SNAP ( SNAP:NASDAQ) recently stated on a conference call that they will not be selling any of their shares from the recent initial public offering. 

The trouble with analyzing insider transactions is that, unless they are put on the spot, you won’t know why the insider is buying or selling. It was widely believed that insider buying is a bullish indicator for the stock. The thought there was that there is only one reason why people buy but a million reasons that people sell. It is debatable whether or not buying by insiders is a bullish signal but it does reduce the number of shares outstanding, which would increase the earnings per share if  revenues stay the same. We could say that insider buys are a vote of confidence but, ehh, we are not that gullible! 

On the other hand, an insider dumping the company stock could be more likely to be a leading indicator of problems. The reason often given is that they are diversifying their portfolios that are concentrated in company stock and the proceeds from the sale are going back into other investments. Some companies require their executives to keep a certain amount of shares of the company. 

Like most things, you have to do your homework to determine whether or not insider transactions are indicative of a stocks potential. With insider selling, though, the question there is, if the insiders don’t want the stock, why would you?