At first glance, it would seem something's wrong.
Corporate insiders - company officers, directors, key employees, and some major shareholders - are selling much more stock than they're buying. Traditional wisdom suggests this is a bad sign for the stock market: If those who lead companies are shedding their investments, it may mean they see rough economic times ahead.
Locally and nationally, there is a selling trend among insiders. Thomson Financial Services, which tracks insider trading, reported this month that insiders bought just $73 million of their firms' stock in July and sold $2.4 billion worth.
In the Toledo area, insiders at 10 large publicly traded companies have sold $61 million worth of stock since Jan. 1, 2002, a period in which they bought $41 million worth of shares.
Some analysts worry that this trend means insiders have little faith in the economic recovery or in their own companies' near-term future. However, some executives who are doing the selling and buying have a different point of view: They're selling old stock (or exercising old options) to buy new shares at attractive prices; they're cashing in on long-term incentives; and they're raising cash to pay taxes on the stock profits they're taking.
Those insiders are taking advantage, they say, of the market's having finally come alive after a three-year doldrum that took a tremendous toll on stocks. In other words, they say they still have faith in their firms.
One who would contend that is George Chapman, chairman and chief executive of Health Care REIT Inc., and the king of insider trading in this region. His buying and selling transactions, under a planned program, total more than $24 million since Jan. 1, 2002.
Thomson Financial said insider buying is at a two-year low, and selling is at a level last seen in mid-2000, after which the Standard & Poor's 500-stock average dropped 28 percent in a 12-month period. Analysts consider the trend bearish, based on market history.
Alan Abelson, the acerbic columnist for Barron's, recently wondered if the selling trend is bad news for the average investor. “... If things look so yummy, why are those worthies selling stock like there's no tomorrow?” he asked. “... No one ever sold a stock because he thought it was going up.”
But there's another side to that story, according to Geoffrey Meyers, executive vice president and chief financial officer of Manor Care Inc. of Toledo, who explained some of the heavy insider trading at his firm, one of the nation's largest nursing-home chains.
Two officers sold about $1.3 million worth of Manor Care stock last month, but Paul Ormond, the firm's chairman and CEO, bought $1 million worth, Mr. Meyers said. Manor Care spun off from Owens-Illinois Inc. in 1991 and awarded options to its officers, and many of those options have been expiring in recent months, he said. The company's stock gained about 30 percent in the second quarter, so such selling was timely, he added.
Some shares have to be sold to raise cash to buy new shares, and a lot of selling is to pay taxes on the gains from the options, he explained.
In the 1990s, the lion's share of insider trading was by executives of the Fortune 500 firms - Dana Corp., Owens-Illinois, and Owens Corning. But lean times for heavy industry have cut stock prices to the point where there's relatively little options activity.
In fact, executives of OC, which has been in bankruptcy since October, 2000, have bought and sold less than $23,000 worth of stock in the last year and a half. Dave Dimmer, a spokesman, said those trades of stock, selling for less than $1 a share in recent months, were triggered by taxes on restricted stock given to officers before the bankruptcy.
Nowadays, the big insider action is at companies like Manor Care, Health Care REIT Inc., La-Z-Boy Inc., Libbey Inc., and Cooper Tire & Rubber Co.
Executives of Libbey, also an O-I spin-off (in 1993), have the same situation as their counterparts at Manor Care. In a filing with the U.S. Securities and Exchange Commission this year, Libbey disclosed many stock options awarded at the time of the spin-off are due to expire and that four top executives would sell a portion of their stock through predetermined plans carried out by independent brokers “without further direction from the participants.”
The SEC amended its rules three years ago to allow for such pre-ordained selling plans so that executives can take their profits in an orderly fashion over a period of time, without having to consider the impact of later disclosures that could affect stock prices.
Libbey officers indicated they will sell more than 312,000 shares, valued at more than $8 million at current prices.
Executives at Health Care REIT, a real estate investment trust that owns nursing homes and other health care facilities, also are regularly buying and selling under such a plan.
Some insider trading reported by area corporations results from generous incentives offered to directors. For example, newly elected directors at La-Z-Boy get 5,000 shares of common stock each for just 25 percent of the market price, but they generally must hold it until they leave the board. Every year they can buy an additional 1,400 shares each at the bargain price, and next year the limit goes up to 2,000 shares.
Other firms, like Findlay's Cooper Tire & Rubber Co., require their executives to own a certain amount of stock, based on their salaries.
Some insider trades are simply executives cashing out after many years of employment. Robert Lanigan, retired O-I chairman and CEO and a longtime director of the firm, sold $1.5 million worth of O-I last year, after exercising options costing $562,500.
Many transactions that show up as “insider trades” are recorded by the SEC only because of rules and have nothing to do with investor sentiment. Such is the case with $24.2 million worth of La-Z-Boy stock sold last year by Monroe Bank & Trust Co., which holds millions of shares in trust accounts.
“The bank thinks very highly of La-Z-Boy,” said Herbert Lock, senior vice president. Many shares were sold to settle several large estates of long-time La-Z-Boy stockholders, he said.
The ratio of selling to buying is low in the Toledo area compared with the national trend, but there are some reasons for that: Prices of most Toledo-area stocks have been depressed for several years, and the area's marketbasket of stocks is laden with manufacturing firms and is devoid of high-tech (a source of much insider selling nationally).