2021 was the year of insider selling, as many CEOs disposed of their shares. According to a Bloomberg report, some of the richest Americans sold off shares worth $42.9 billion through early December, which was more than double the shares worth $20.2 billion sold off in 2020.
Let’s look at the reason behind this uptick in this stock sell-off and what type of insider signal it sends out to retail investors. But first, let’s look at who exactly are insiders.
Insiders are investors who have a more than 10% stake in the company and are a principal stakeholder, an officer or a director. According to the Securities Exchange Commission (SEC) regulations, insiders must file forms every time they buy or sell shares.
However, to prevent insiders from trading shares using non-public information to which they have access, the SEC prohibits insiders from disposing of shares within six months of purchasing them.
Let us analyze some of these insider transactions by company CEOs and the possible reasons behind this sell-off.
Tesla (NASDAQ: TSLA)
Elon Musk, the CEO of Tesla and considered the richest person in the world, has been on a stock selling spree. In November, the CEO took a poll on Twitter (TWTR) asking people whether he should sell 10% of his Tesla shares to pay taxes.
When a majority of Twitter users voted yes, Musk began offloading his stock. On December 29, the CEO stated in an interview to the Babylon Bee, as cited by CNBC, “I sold enough stock to get to around 10% plus the option exercise stuff and I tried to be extremely literal here.”
Musk sold another 934,090 shares on December 29, at a worth of $1.02 billion, taking the total shares sold in 2021 to a value of $10.6 billion. What’s more, Musk also exercised options to buy around 1.6 million shares at an exercise price of $6.24 per share. This is the first time that Musk has sold his shares since 2016, according to Bloomberg.
Tesla’s shares have surged 56.4% in the past year.
So, what prompted Musk’s sell-off? Well, it could have been prompted by the “billionaires tax” that was earlier proposed by Democrats. In fact, the TSLA CEO tweeted, following the recent sell-off, that he anticipates paying more than $11 billion in taxes for 2021.
We will look at the billionaires tax proposal in more detail later in this article.
When it comes to Tesla’s investors, however, they remain very positive about the stock. According to the TipRanks Crowd Wisdom tool, 1.7% of portfolios out of 538,832 portfolios have upped their holding of TSLA in the past 30 days.
Amazon (NASDAQ: AMZN)
Jeff Bezos, the world’s second-richest behind Musk and the Executive Chairman and former CEO of Amazon, is also on a selling spree. Last year, Bezos sold shares worth $9 billion, still below the $10.2 billion worth of stock sold in 2020.
According to a Wall Street Journal report, the founder of Amazon sells around $10 billion worth of stock every year to “fund his space venture, Blue Origin LLC.”
Shares of AMZN have gone up only 4.1% in the past year, generally underperforming the U.S. stock-market indexes.
Still, Wall Street analysts envisage the stock to have an upside potential of 23.5% to current levels with an average Amazon price target of $4,137.50 and are bullish about it. They have rated the stock a Strong Buy based on the consensus of 30 Buys.
Meta Platforms (NASDAQ: FB)
Meta Platforms’ CEO, Mark Zuckerberg, is another one who is offloading his shares, seemingly in a hurry. According to a Bloomberg report, the CEO sold stock on almost every weekday last year.
How much stock? Well, Zuckerberg sold around 13.8 million shares last year, landing him a windfall of $4.5 billion, almost eight times what he sold in 2020. This was even as FB’s price soared 24.2% in the past year. Zuckerberg sold only 1.5 million shares in 2020, at a value of $405 million.
What about other corporate insiders? Well, they are also selling shares, worth approximately $771 thousand to be precise, in the last three months, indicating that insider confidence signal is negative about the stock.
On the other hand, the stock offloading by Zuckerberg could possibly be prompted by his aim to donate more towards the Chan Zuckerberg Initiative. Around seven years back, following the birth of his daughter, the CEO of FB vowed to give away 99% of his shares towards charitable causes.
The negative confidence signal aside, analysts are bullish on FB. It is one of TipRanks Top Stocks, with a Strong Buy analysts’ consensus rating based on 29 Buys and 6 Holds. The average Meta Platforms stock prediction of $406.31 implies upside potential of 20.7% to current levels.
Snap (NYSE: SNAP)
Evan Spiegel, CEO of social media giant Snap, has also been selling off stock. Spiegel received $710 million (before taxes) last year on the sale of 10.6 million shares, more than double his proceeds of $265.6 million in 2020. He sold around 15 million shares in 2020.
It is important here to note that corporate insiders can sell stocks either through a broker or through a 10b5-1 plan. The SEC’s 10b5 ruling allows insiders to trigger a trade for the stock in which a date or price is pre-set for the sale of the stock.
According to a Wall Street Journal report, the 10b5 plans were used in 66% of stock sales in 2020, more than double the figure of 30% in 2004.
So, why the stock sale? Are insiders turning bearish on SNAP? Even a look at SNAP’s Insider Trading Activity on TipRanks indicates that in the last 3 months alone, corporate insiders have sold shares worth more than $14.8 million, indicating that the insider confidence signal on the stock is very negative.
However, the most recent quarter SNAP stock earnings indicate that the company did well in the third quarter. Net loss improved year-over-year by 64% to a negative $72 million. Reported loss came in at $0.05 per share versus analysts’ expectations of a loss of $0.10 per share. The company reported adjusted EBITDA of $174 million, indicating an improvement of 209% from the same quarter of the previous year.
Block (NYSE: SQ)
Shares of Block have been in a free-fall over the past year as the stock dropped around 32%. There is also the possibility that this drop in stock price could have been exacerbated by the actions of the Founder and CEO of Block, Jack Dorsey, who sold off stock worth $445 million last year, more than thrice the shares worth $127 million that he sold off in 2020.
According to Block’s annual report filing, Dorsey is a controlling shareholder in the company. As a result, Dorsey’s sell-off can be perceived as a negative insider trading signal by retail investors.
But a factor behind Dorsey’s sell-off has also been his charitable ambitions. In 2020, he tweeted that he will be “moving” approximately $1 billion worth of his stake in Block, that is, around 28% of his wealth, to fund COVID-19 relief efforts globally. He added that this would be done through the arrangement of a limited liability company (LLC) that will operate transparently.
According to the TipRanks Insider Trading activity tool, corporate insiders have sold shares worth $43,900 in the last three months alone, indicating that the insider confidence signal in Block is negative.
But is this confidence in the company really declining? Looking at the transition that Block is currently undergoing, it doesn’t seem so. In December last year, the company announced its name change from Square to Block to acknowledge “the company’s growth.”
Earlier, SQ, founded in 2009, provided an ecosystem that catered to the Seller business and included commerce solutions, business software, and banking services for sellers. Now renamed Block, SQ is also venturing into cryptocurrency based on blockchain technology.
Even analysts are cautiously optimistic about this transition for Block and have a Moderate Buy consensus rating on the stock, based on 16 Buys and 6 Holds. The average Block stock prediction of $285.29 implies upside potential of 82.5% to current levels.
Billionaires Tax proposal
So, what was the billionaires tax that seems to have been nixed? Well, this proposal put forth the idea of taxing the top 10% wealthy individuals in the United States on “unrealized capital gains.”
These unrealized capital gains are defined as the increase in the value of assets like home, business stocks, and mutual funds, gained from holding on to these assets over a period of time. This proposal planned to levy taxes on these unrealized capital gains by valuing these assets annually.
Democrats had put forth this proposal in a bid to raise revenues as a part of an infrastructure and environment bill worth $2 trillion. President Biden had also proposed hiking the capital gains tax rate to 39.6%.
Additionally, this legislation proposes a 5% tax on adjusted gross income higher than $10 million. It also includes another tax of 3% on income above $25 million. The legislation, which seems to have been axed for now, includes capital gains earned from sales of stock.
It appears that the sell-off by these CEOs could have been largely prompted by an attempt to avoid a hefty tax bill this year.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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