Thursday, August 11, 2011

Is the Insider Buying Significant?

Since posting on the recent insider buying, I have been deluged with emails pointing me to a Zero Hedge comment on the insider buying as insignificant, primarily for two reasons:

1. The absolute size of the buying is small (roughly $20 million)

2. The size of the buying relative to selling is small.

Here's the thing, ZH makes it out to be a size problem, and while I agree size does count in many things, it doesn't when it comes to insider buying.

The thing is 66 insiders at 50 companies bought shares between Aug. 3 and Aug. 9, the most since the five days ended March 9, 2009, when the benchmark index for U.S. equities reached a 12- year low.

These aren't the CEOs at these companies buying. The CEOs already have their stock positions and stock options.  These are the little guys at the companies (That's why the total dollar amount is low) and those are the ones you want to watch.

These little guys, who barely need to fill out an insider form and have very little money with which to buy stock. But they know what is really going on at a company. If they are putting their hard earned money into company stock, it's because they see something developing at the company that will push the stock higher--soon.

The larger the number of these little guys putting money into a stock, which may really shrink the per insider buying average, the more bullish it is. Thus 66 insiders across 50 companies is very bullish, especially given the low per average buy. You are looking at a senior VP sales manager, or senior VP purchasing manager, insider buying. They see order flow and know when things are turning.

As for insider selling, it is nowhere near an important indicator as insider buying. As I pointed out in my initial post, insider buying only occurs when someone wants to make money. Insider selling can occur for a multitude of reasons that have nothing to do with the prospects of a company. A seller may be going through a divorce. He may be buying a house. Etc. The point is selling can go on regardless of the prospects of a company. It is rarely a sell signal.

But buying from guys low on the corporate ladder is almost always a very bullish sign. And you can email that to Zero Hedge!


  1. It's analysis like this that makes EPJ so great.

  2. Oops! I posted this in the wrong thread.

    Let me offer my perspective having been an insider twice in my life. The first time I sold my company and was given over a million shares in the parent company's stock. The company that bought my company had also bought 8 other companies at the time, so there were others in similar situation as me. I was made an exec and given a seat on the board. When the stock shot up through the roof in 1999, every insider except the CFO, CEO and outside board members wanted to sell as much as they could to diversify if nothing else.

    When the stock crashed in 2000, we were requested to stop selling and buy some shares to show confidence in the stock. I can tell you that when you hold so much of your wealth in your company's stock and the price is going down, you do not want to buy more. IMO, insider buying in a down market means that management is scared of further price declines. When insiders are buying in an up market, that's a positive sign.

    One other thing, just working for a company does not make you an corporate insider in the sense of having to report transactions and holdings to the SEC. Reportable transaction are typically required for officers, directors and greater then 10% shareholders. The a/p clerk buying/selling his company's stock during the open window period is not reportable and thus no one knows about them. I disagree with your assertion that the insiders being reported are people that can barely afford to buy shares. That may be true in the '34 Act companies since they tend to have micro-capital structures but not the majority of public companies.

  3. How can it be "the little guys" when the Bloomberg article you linked to states specifically that it is executives who are doing the buying?

    Executives are the "big players" who have lots of money to invest. The "small players" are not who Bloomberg reported on.

    For example, they write:

    "Chief Executive Officer James Gorman and two other managers purchased 175,000 shares of the New York-based bank as the shares fell to the lowest level since March 2009, according to filings with the U.S. Securities and Exchange Commission."

    and then:

    "CEOs, directors and senior officers bought stock as the S&P 500 fell 18 percent from this year’s high on April 29 on concern about Europe’s debt crisis and the political battle over the U.S. debt ceiling. The index is trading at 12.3 times earnings in the past year, compared with its average since 1954 of 16.4, data compiled by Bloomberg show."

    and then:

    "General Motors Co. (GM) CEO Dan Akerson purchased $250,500 in shares of the automaker on Aug. 9, a day before the stock fell 6.3 percent to $23.92, the lowest level since its November initial public offering and down 35 percent for 2011. Akerson bought 10,000 shares for $25.05 each, bringing his total to 103,600, Detroit-based GM said in a regulatory filing."

    and then:

    "CEO Ahmad Chatila and five other officers at MEMC Electronic Materials Inc. (WFR), which has a price-earnings ratio of 8.4, bought a combined 468,057 shares of the silicon-wafer maker on Aug. 5, when the stock sank to the lowest level since October 2002, regulatory filings showed. Shares of the St. Peters, Missouri-based company rallied 19 percent to $5.93 on Aug. 9, when the transactions were disclosed."

    and then:

    "Robert Hugin, the chairman and CEO of Summit, New Jersey- based Celgene Corp. (CELG), bought shares of the maker of blood-cancer drugs for the first time since at least 2003, according to data compiled by InsiderScore. Hugin acquired 10,000 shares on Aug. 8, when the stock fell to a five-month low, while Chief Financial Officer Jackie Fouse bought shares three times this month, according to SEC filings. The stock climbed 4.2 percent on Aug. 9 and closed at $51.85 yesterday, down 12 percent for the year, data compiled by Bloomberg show."

    and finally:

    "Executives at 14 S&P 500 companies sold shares between Aug. 3 and Aug. 9, according to Bloomberg data, bringing the ratio of those with buyers and those with sellers to 7 to 2."

    Where the heck are you getting these "little guys" from?

  4. They are just signaling that our Owners are going to prop up the markets. Who do you think is manipulating the markets? A handful of HUGE buy orders amongst millions of sell orders...Hmmmm.

  5. I hate to say it, but here is an area where an empirical test would be valuable. I'm sure there have been studies on this thesis that insider buying is indicative of higher prices given that it is easily testable (say, price one year following an insider purchase).

    My experience is that insiders (I've been a Section 16 officer/director for several companies) often delude themselves into believing rosy futures. Similarly, I haven't seen a positive correlation between stock buybacks and ensuing positive performance. I'm sure there are studies here too.

    Finally, the major effects/risks being discussed here are macro and not micro. Corporate insiders normally aren't terribly sophisticated macro analyst/predictors where company-specific performance can be swamped by the macro trends discussed here.

  6. @Major-Freedom

    I just went back to the SEC filings and it looks like you cherry picked the 5 CEOs that bought stock. The other 61 were junior to the CEO. Also a total of 919 insiders bought stock among all publicly listed U.S. companies between Aug. 1 and yesterday.

    It looks like they are piling in to me.

  7. I just went back to the SEC filings and it looks like you cherry picked the 5 CEOs that bought stock. The other 61 were junior to the CEO.

    Junior to the CEO does not mean they are "the little guys."

    I didn't cherry pick those 5 CEOs, I just copied and pasted them from the Bloomberg article, the one Wenzel originally linked to.

    Also a total of 919 insiders bought stock among all publicly listed U.S. companies between Aug. 1 and yesterday.

    I thought it was 66 in 50 companies. Where are you getting your information?

  8. LOL, the same story you are.

    You have to read the entire story.

  9. Wasn't there a lot of insider buying by the little guys at Enron?

  10. Seems like there's some confusion.

  11. Hahaha, I'm an idiot.

  12. Funny Not one MSM Economic news channel has mentioned today's 30 year auction failure. Seems were all nice and complacent with the Stock Market circus show.

    Hmm, their plan is working just fine ( wink )

    CNBC pulled the article as noted here along with a copy of the original.

  13. As a "little guy": if you can glean data as to stock trades of middle management (not officers but know the score), you would hold the keys to the kingdom... just sayin'.

  14. Bill,

    The publication date on the article you link to is from Feb 2010.