Does Insider Selling Really Give Awesome Signals? GMCR Case Study

insider selling

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It's only been all over the news but if you haven't heard here is the latest from Bloomberg:

Robert P. Stiller, founder and chairman of Green Mountain Coffee Roasters Inc. (GMCR), sold $66.3 million of his stock before it plunged the most in four months on news that Starbucks Corp. (SBUX) had developed a rival to its K-Cup brewer.

Stiller’s combined sales on Feb. 15 and 24 were his largest in a single month since at least 2003, when the stock traded below $2, data compiled by Bloomberg show.

I have news for you people, executives do this all the time. Just not on this scale. Most will buy/sell stock throughout the year and they do so typically because they know something we don't necessarily.

But are they always right in their transactions and should we use it as a market signal? Before we explore this, here's the chart of GMCR.

I Never Really Believe The Insider Trading Theory

I used to work both in M&A investment banking and as a REIT analyst so I know the limits on who can and can't purchase stock and what you have to go through to do it.

Even for a guy like me working for these banks I had to file paperwork with someone higher up before I placed a trade or put money to work; and I can only image the strict filing that an executive would go through.

Was He Wrong To Do?

If he did it legally - hell no! Not a chance! He has a right to make money too and IF he filed the paperwork correctly and on-time then all he did was make a great investment decision.

We don't criticize executives for pouring money into their own companies stock then who are we to say the can't take money out when the feel like it. He didn't liquidate his entire stake in the company and therefore has the right to sell stock.

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Size Does Matter w/ Insider Selling

I think this is a great example of when insider selling signals do work. And only because of it's size and scope.

This isn't a 3rd or 4th level Managing Director selling 1,000 shares; this was the Chairman and Founder selling more than 6.9% of his stake in the company (more than 1 Million shares).

Again those statistics that are glaring and obvious deserve our attention as traders. The smaller transactions we can all pass up, but these whales we have to keep an eye out for.

Remember the Enron scandal? Here is what the insider chart looked like for that company! Notice anything out of the ordinary as the stock started to peak.

What's Your Take?

Add your comments below and let me know what your take on all this insider selling. Do you think these types of transactions help signal a bigger move in the stock later on or not?

Was this guy wrong in selling his company's stock ahead of the Starbuck's news?

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.