In the intricate world of investing, knowledge is without a doubt leverage. And when it comes to gaining a competitive advantage, the analysis of company insider trades becomes an indispensable instrument for investors. To be clear, we are discussing the legal analysis of publicly available insider trading data, not the unlawful practice of trading based on confidential information.
The March 2023 banking crisis was a brief but sharp drop in the stock prices of several small to mid-size US banks. Investors began to lose faith in the banking sector because of concerns over borrowing, fintech competition, and the trade war between the US and China. This resulted in a dramatic sell-off. There was a spillover to other financial firms, and for a minute, things were looking ugly.
I have a huge database of insider trades stretching back 40+ years. What it does show is the ‘quality’ of historical insider trades. Have these people been right in their predictions of future stock prices? You’ll be surprised, not all insiders are good at buying their own stock. On March 14th, I noticed that the insiders at The Charles Schwab Corporation (SCHW) were buying after a run on their shares. The media had reported it to be a great endorsement from management, and in a second, following their purchases, they were seeing upgrades from big banks. However, something didn’t seem right to me. The insiders were senior figures, including the CEO and CFO, but these guys, for one, had no track record of being ‘key’ insiders (good at predicting stock prices), nor were their purchases anything significant compared to their holdings. between an 8% increase for the CEO and 14% for the director. The whole episode looked staged. They did enough to stop the selling, but those investors buying with them are pretty much sitting on a flat position or a loss 5 months later with an S&P index (SPY) higher by over 12% over the same period. The company guided down in April, so shares are likely to remain stagnant or run the risk of going lower in a weak market.
The key point to remember here is that you should always analyze before buying (or selling) with company insiders. Here is a 5-point checklist:
- 1) Work Out the Insiders Intent - Start by researching the recent developments and news surrounding the company. Understand if there have been any significant announcements, changes in leadership, or shifts in the company's strategic direction. By gauging insiders' motivations, as an investor, you can better assess the significance of their trades.
- 2) Figure Out the Timing - Significant insider buying could mean something is coming. It’s worth checking out the calendar of events on the company website. Failing that, it’s a heads up to carry out deeper analysis. Apple increased its quarterly dividend and announced a $90 billion share repurchase program in April 2015. Several top Apple executives, including CEO Tim Cook, bought large amounts of shares in the company in the days leading up to this announcement. Tim Cook spent almost $57.8 million for 949,849 shares of Apple stock.
The importance of the timing of these insider transactions can't be overstated. These events preceded a large capital allocation announcement, suggesting that firm leaders were optimistic about their future. The market appreciation that followed proved the value of timing analysis in detecting insider trading. After you notice and study these sorts of patterns, you learn to spot patterns in timing to anticipate potential market movements.
- 3) is Buying or Selling? – The significance of insider trading stems from the fact that certain positions within a company provide greater insight into its prospects. Senior administrators and board members typically have a greater understanding of the company's internal operations, strategies, and financial health. Their trading activities are more indicative of the trajectory of the company. Conversely, lower-level employees may not have the same level of insight and may trade it for personal financial gain.
In 2017, Jeff Bezos sold more than one million shares of Amazon (AMZN) stock. The value of the shares sold surpassed $1 billion. Even though such a substantial insider transaction may raise concerns, it is crucial to consider the surrounding circumstances. Bezos's sale was prearranged via a 10b5-1 trading plan, which allows insiders to schedule transactions in advance and precludes the possibility of insider trading accusations. In addition, throughout the years, Bezos consistently sold a portion of his Amazon shares to finance other endeavors, such as his space exploration company Blue Origin.
- 4) Distinguishing Routine from Signal – The following will determine how strong the signal is:
- Dollar Amount Bought or Sold – Significant or Not?
- Amount in Relation to What They Already Own – Large averaging is a positive.
- Net Worth – How much of their net worth are they buying as stock?
- Value vs. Catalyst Buyers – Buying because there is an event coming up or stock just cheap?
- Open Market Purchases – Only these transactions count.
- 5) Track Record Matters – This point is gold. A director's history of share purchases can provide a glimpse into their past accuracy in gauging the company's trajectory. If a director has a track record of buying shares before significant positive price movements, it enhances their credibility as someone who can accurately assess the company's performance and potential. Such insight can be reassuring. It's like when you're trying to decide which restaurant to go to, and your foodie friend always picks the best spots. Research the director and his historical purchases. How good he has been in the past? This goes for whatever company he has been with.
Compare the examination of insider transactions to the examination of puzzle pieces within a larger image. Insiders' purchases and sales of shares provide valuable insights, but you must consider industry and market trends to accurately interpret them. In the absence of this context, confidential transactions can be deceptive. For instance, a CEO's stock purchase may appear positive, but if you are unaware of the industry's challenges, it may only be a temporary boost. In contrast, instances where insider transactions coincide with broader trends highlight their importance. During the collapse of the dot-com bubble, insiders who sold tech shares prior to the collapse exhibited market awareness. Similarly, insiders who sold financial stocks before the 2008 financial crisis demonstrated their awareness of the impending turmoil. Understanding insider trades within the larger industry and market context reveals their true significance, confirming or challenging assumptions and provides a more accurate view of a company's direction and the market's trajectory.
On the date of publication, Jim Osman did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
