The Globe and Mail

If actions speak louder than words, then you’ve got to wonder whether U.S. corporate executives are really as confident as they say they are.

Market watchers has been taking it as a bullish sign that management at U.S.-listed firms have grown bolder about their companies’ earnings prospects. Yet, at the same time, executives have also been selling their own companies’ stock at an unprecedented pace.

It certainly creates the appearance that they aren’t willing to put their money where their mouths are. Is the earnings-outlook bravado just a lot of cheap talk?

Talking sweet, cashing in

When U.S. companies publicly disclose guidance to investors regarding their earnings expectations in advance of formally releasing their results (so-called “pre-announcements”), it’s typical that many more ratchet back their earnings estimates than increase them from earlier projections – the historical ratio of negative to positive announcements is roughly 2-to-1. But over the past three months, noted strategist Pierre Lapointe and economist Alex Bellefleur of Brockhouse Cooper, negative guidance announcements have faded to their lowest level in 10 years of collecting the data. Positive pre-announcements actually outnumber the negatives.

Yet the selling of stock by company insiders has soared, to roughly triple its levels in early 2009 and roughly double its typical levels over the past five years. Insider buying, by contrast, has stagnated – leaving the ratio of insider-selling-to-buying at the highest seen in eight years of data.

Residue of the recession?

But Mr. Lapointe and Mr. Bellefleur don’t think this is cause for concern – in part because they believe the market’s crash and subsequent recovery have distorted the insider trading trends.

“Insider selling slowed to a crawl around the market trough [of early 2009],” they said in a research note. Senior managers – who generally receive stock-based pay as a significant chunk of their compensation – were in no hurry to convert that stock into cash when stock prices were deeply depressed. But with the market recovery now well in hand, they’ve been catching up on lost time.

Mr. Lapointe and Mr. Bellefleur argue investors should instead focus on the bullish signal from the plunge in negative earnings guidance. But I’m not convinced; in fact I wonder whether the pre-announcement data, too, has been distorted by a post-recession change in management’s approach to guidance.

At the very least, something is amiss. The negative outlooks have tumbled, but the positive outlooks have remained flat, meaning that overall there has been a substantial drop in estimate revisions in general. Maybe what we’re seeing isn’t increased confidence on the part of the executives, but rather increased reticence to fine-tune profit outlooks in the midst of an uncertain and inconsistent economic recovery.