Insider buying and selling

Insider buys at market price when a stock is going up should be a strong positive sign. Similarly, insider sales when a stock is going down should be a strong negative sign. In both cases, especially when it’s a significant dollar value.

I’ve been looking at a lot of stocks this way, and I’m seeing much more selling than buying, including a lot of exercised options. Almost never am I seeing an insider buy a bunch of shares at the market price. In some cases, the stock has gone up quite a bit for quite a wile after these sales.

Has anyone else looked into this? With the kind of stocks we’re discussing here, I would have expected to see a lot more insider buying. Or is it that they all have lots of stock options?

I found another stock besides UBNT where the CEO owns a huge amount (Walgreens - WBA), although not nearly the fraction that Pera holds, since it’s a much older and bigger company.

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Hi Ed,

In my admittedly limited experience, this is how I treat insider trading:

All Sales : utterly irrelevant. Red herrings. We can’t possibly have enough information to make any sensible conclusion. Best to ignore and not waste our limited time analysing.

Buys: almost similar to above except when a CEO is buying during positive momentum. i.e. a CEO net buying when his or her’s company’s stock price has risen strongly, then that’s a positive sign.
You could stretch this to include a COO or CFO maybe, but I tend to stick with looking at the boss.

As always, it’s just one signal of many when analysing and investing in a company.

That’s just the way I look at it. With most of the stocks here, you’re right, a lot of stock options. However, when UBNT buys back shares, it’s effectively Pera buying it back, and historically the buy backs have been very well timed.

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Sometimes, insiders have programmatic plans set up, where they sell on a set schedule that is irrespective of the market price or any insight into the companies’ performance. I think that was the case with some relatively recent sales by Arista Networks CEO Jayshree Ullal. Also, there were a lot of insider sales of Foundation Medicine a few weeks back, but the selling was to ensure tax liabilities were covered, which was mentioned in the Form 4’s filed with the SEC.

If one wishes to glean anything close to useful information based on an insider sale, I would recommend reading the Form 4’s. I think companies generally have the forms available directly from their investor relations pages…which might even almost be an SEC requirement (definitely a best practice if not a requirement).

Also, in the case of Ubiquiti CEO Michael Pera, he did sell a portion of his own shares back in early September, if I’m not mistaken. A bit of digging and knowledge of his most expensive hobby of owning an NBA basketball team (majority Grizzlies owner) revealed that the ownership structure had an interesting quirk where the owners could buy each other out in October/November of 2017. Thus, I and a few others were able to deduce that that sale from Pera was associated with that upcoming deadline for a possible buy-out of the other owners. Pera essentially confirmed that by stating that his sale of shares was to ensure that he wasn’t put into a position where he could be taken advantage of.

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“Buys: almost similar to above except when a CEO is buying during positive momentum. i.e. a CEO net buying when his or her’s company’s stock price has risen strongly, then that’s a positive sign.
You could stretch this to include a COO or CFO maybe, but I tend to stick with looking at the boss.”

Two cases when CEO’s bought near bottoms and investors were well rewarded were the Jamie Dimon bottom for JPM and Steve Wynn’s big buy near the lows for WYNN.

Rob

I’ll preface this by saying I’ve not studied this closely or over a large number of instances so I could easily be wrong.

That being said, I’ve never noticed insider trading to be a good indicator of much of anything. There have been a few exceptions, like the CEO of Equifax unloading a bunch of shares after the data breach but before the announcement, but it was only visible after the fact. Without the insider knowledge at the time it just looked like any other insider trade.

That’s the whole problem in a nutshell. Without knowing what motivated the trade you just don’t have enough knowledge to make anything of it. Even if you read the Form 4s, you’re not going to learn anything that has to do with the internal operations of the company. No executive is going to put anything like that in a published document.

I ignore insider trading. So far as I can tell, it has not hurt my portfolio’s performance.

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In my experience insider trading is mostly irrelevant. The only case that might be considered important is strong insider buying in the open market by many insiders, not just one. The CEO of Chesapeake Energy almost went broke buying shares of his company on margin. But if several insiders are buying strongly at the same time in the open market it might be good to find out what they know or think they know. Only once did I buy shares in such a scenario and it was a good trade – I don’t recall the stock, it was a long time ago.

Denny Schlesinger

Denny,
Absolutely correct. In addition, if there is a consensus of insider buying in the open market don’t look for a quick upturn. Insiders have a longer term perspective on the prospects of their company. Also, look for the buying to occur over a period of time. Insiders do not want to forfeit their profits by violating insider trading rules. Insider buying is a good indication of a turnaround situation for a company.

There are many reasons to sell a stock in your company, but only one reason to buy - to make profit.

Insiders could also buy shares in order to hide something, but then the amount would probably be a giveaway.

I was thinking about all this after reading George Muzea,who used insider transactions as an indicator. He also used the remarks of pundits in the media as a contrarian indicator, calling all the noise “the trivial many.” Even before reading him, I would often think that I should do the opposite of whatever Jim Cramer recommends.

Insider buys at market price when a stock is going up should be a strong positive sign. Similarly, insider sales when a stock is going down should be a strong negative sign. In both cases, especially when it’s a significant dollar value.

I’ve been looking at a lot of stocks this way, and I’m seeing much more selling than buying, including a lot of exercised options. Almost never am I seeing an insider buy a bunch of shares at the market price. In some cases, the stock has gone up quite a bit for quite a while after these sales.

Hi Ed,

I used to have these same concerns also, but then a few years ago I looked at Amazon.

Amazon had had literally hundreds of insider sales when it was at $50, hundreds more when it was at $100, and at $150, and at $200, and at $250… and well, you get the picture. Never any insider buys, or just the very occasional one. Well, right now it’s over $1,350. And all those insiders who sold would have a lot more money if they hadn’t sold, but sell they did.

I hope that helps,

Saul

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