“American Realty Capital Properties insider just disposed of 20,000 shares.”
I saw that headline come across my Twitter feed, and I was particularly jarring to me because I had specifically listed consistent insider buying as a reason to give American Realty Capital Properties (NASDAQ:ARCP) the benefit of the doubt after its accounting bomb was dropped earlier this week. Ten different ARCP insiders—including the company’s general counsel—have purchased a combined $3 million since January of this year.
So, a disposal of 20,000 shares by an insider would seem to throw my argument out the window.
Let me let you in on a little secret: Not all insider trades are created equal. It’s very easy to look at the wrong kind of trade and draw the wrong conclusion.
Let’s take a look at the insider in question, Lisa McAlister. McAlister was one of two ARCP executives to be fired over the recent accounting scandal, which overstated ARCP’s adjusted funds from operations (a non-GAAP metric for gauging REIT profitability). She was the Chief Accounting Officer–and presumably the person directly responsible for the accounting misstatement. The timing of her sale–Oct 28–looks particular suspicious considering that was the day the scandal broke.
Here’s the story. She didn’t actually sell her stock. These were restricted shares issued as stock-based compensation that had to be forfeited after her resignation. Check it out for yourself; the SEC lists a “sale price” of $0.
How to Look at Insider Trading Data
Let’s move away from ARCP for a moment and focus on the larger issue of insider trading. It’s really not newsworthy when a company insider exercises stock options or acquires restricted stock as part of their executive pay. This is not really “buying” or “selling,” and it doesn’t give us any real information. Any smart insider will, for tax reasons, immediately sell stock that they acquire from the exercise of options. So if you look at the stock sales in a vacuum, you might draw the conclusion that the insider is unloading shares in anticipation of bad results when he or she is really just doing some tax and portfolio housecleaning.
The insider trading that actually matters are buys and sells in the open market. These are discretionary trades made by the insider based on their own assessment of the stock’s value. This isn’t CEO cheerleading; it’s putting their real money on the line.
Do the insiders always get it right? Of course not. But I’d rather be investing with them than against them.
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