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Ryan Modesto, CFA, is Managing Partner at 5i Research, a conflict-free investment research provider for retail investors offering research reports, model portfolios and investor Q&A. 5i Research provides content under an agreement with The Globe and Mail, which receives royalty compensation. Try it.

Investors have many things to worry about.

Some of the worries are legitimate, many are not and most can be short-term issues that scare an investor out of a good company and investment.

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One of the areas that consistently scares an investor out of a stock is that of insider selling. While insiders buying more shares with their own money can be a great indicator of future results, we think investors are far too reactive to insider selling. Here are a few instances where we believe insider sales should be given a "pass."

When it is in small amounts

All too often, we see investors getting very concerned at the first hint of insider selling. If it is in smaller amounts and not done on a consistent basis, we think the concerns are overblown more often than not. Investors can often forget that executives are real people as well. They have houses to buy and bills to pay, just like everyone else. Sometimes this is funded through share sales. In a similar vein, everyone also wants to enjoy the money they work for. This is no different with insiders when selling small amounts relative to the total holdings.

When it is for estate planning

Often an insider who holds a good portion of outstanding shares will need to move funds into a holding company or trust to allow for the efficient transfer of funds to charities or future generations. We would view this as less concerning. Additionally, if an insider is older in age or approaching retirement the sale of shares is more justified.

When insiders continue to hold substantial exposure to the shares

This point explains itself, but if an investor reduces holdings to zero, that may be a concern. But if they continue to hold a material amount of the outstanding shares or a material amount relative to their net worth, we think sales can be given a pass.

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When the stock "doubles"

This is another one we see a lot from investors, and we think this is one of the more common cases.

A stock will rise by a large proportion and an insider will sell shares. Many investors take this as a signal that shares are overpriced and it is time to run for the exits. What they often miss is that, even after the sale, an insider may have more exposure to the company than they did in the first place. A recent article in the Globe highlighted a company (CRH Medical) we hold in our model growth portfolio that offers a great example.

Three executives at CRH (we will simply call them Executive 1, 2 and 3) sold shares in the $9.15 range. Executive 1 has gone from holding 2.09 per cent of outstanding shares since September 2016 to 1.39 per cent; or from 1.51 million shares to 1.01 million. Executives 2 and 3 are seen as both selling 30,000 shares going from 0.18 per cent to 0.14 per cent and 0.33 per cent to 0.30 per cent of outstanding shares since September respectively. Meanwhile, the share price has risen from $5.09 to $9.19 over the September to February time frame, an 80-per-cent return. While at face value, it looks like insiders are selling and don't like the shares, but they actually hold more exposure to the company than they did a year ago. The actual dollar exposure of the stock has grown over the period as follows (in millions):

Executive 1: $7.69 to $9.28 or a 21-per-cent increase

Executive 2: $1.22 to $2.02 or a 66-per-cent increase

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Executive 3: $0.66 to $0.92 or a 39-per-cent increase

So while the insider sales of shares may alarm investors, in reality, the executives have more skin in the game than they did to begin with. One could almost spin it in a positive light, as the net exposure of the executives has increased while they had a chance to pull the insider sale band-aid off quickly if they were truly concerned with the stock.

We do not mean to imply that the actions of insiders, those closest to the operations of the company, do not warrant attention for an investor. But we think in many cases, close attention to insider sales can cause more harm than benefit to an investor as it leads to many getting scared out of good companies where insiders are selling simply because positions have grown so much. There are cases where an insider sale should be taken very seriously, but we would be wary of painting with a broad brush in the case of insider selling.

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