CSL's McNamee sells down. Should you?
Last week, CSL chief Brian McNamee announced the sale of $8.4 million worth of his shares in the company, amounting to about one sixth of his total holding. There is no doubt that this is a significant sale. How CSL shareholders interpret its significance is less certain.
At times I have regretted not following the insiders' moves after holding on to my stock. Equally, there have been occasions where the share price has surged after sales like McNamee's. There is simply no clear-cut rule to follow when an insider in a stock you own disposes of a large parcel of shares.
But there are two key questions to ask when considering such sales, the answers to which might provide some guidance for you:
1. Is the stock expensive?
In January 2008 The Intelligent Investor published an analysis of then-darling stock Reverse Corp (which offers the 1800-REVERSE service). Our analyst noted the combination of an expensive-looking stock price and sales by founder and executive director Richard Bell. We suggested investors steer clear and shareholders follow Bell's lead. The stock price is now down 95%. But how does CSL fare on this score?
Coincidentally, the same analyst who pulled apart Reverse Corp also covers CSL for The Intelligent Investor. Almost two years to the day after issuing his negative view of Reverse Corp, he recommended CSL to our members at $31.30 per share.
That price, Nathan Bell explained, was ''reasonable for such a high quality business''. Even though CSL shares have risen by 15% since January, we don't believe the overpriced condition applies in this case.
2. Is this a series of sales by the same director or, more importantly, sales by multiple directors?
Between October and December 2007 we noted nine sales by six individual directors of Roc Oil, at prices between $2.95 and $3.43. The share price today stands at 36 cents.
In CSL's case, the previous director sale came from Ian Renard in August last year. To find the next most recent sale, you have to go back to McNamee's previous sale in April 2007.
To me, this record is clean enough. McNamee is not a serial seller (at least, not yet) and nor are his fellow directors.
When looked at in this light, McNamee's sale shouldn't send waves of panic through CSL's share register.
But insider sales should always be taken seriously, even if they don't necessarily prompt a sale in your own portfolio. Director sales are not always a bad sign but they're never a good one. To wit, if you've had your CSL shares in the bottom drawer for a few years, it may be time to move them a little closer to hand and follow the story a little more carefully.  
If you're interested in following share purchases and sales, the free site Directors' Transactions (run by The Intelligent Investor) is designed to help you do exactly that.

Greg Hoffman is research director of The Intelligent Investorwhich provides independent advice to sharemarket investors