Insider Transaction Truths (reprise)

A few weeks back I did a post about how insider selling in the aggregate was not a very worthwhile stat to follow when trying to discern the market’s direction.  It was late April and the insiders were net sellers into the rally, with very little buying.

The market got ugly shortly afterward and May turned out to be one of the worst months ever for the major indexes.  And insider buying has gradually inched up into the selling, believe it or not.

As a reminder that this indicator indicates nothing, I’ve got my “truths” about following insider transactions below…

originally posted 4/27/2010

There will be generalizations below, take them with a grain of salt:

1.  “Growth Stocks” don’t get bought by insiders and executives unless the shares get hammered by a one-time event.

2.  Insider buying in “Value Stocks” is way more meaningful, especially in turnaround situations.

3.  Technology executives would rather be locked in a dark basement, listening to Billy Joel’s Uptown Girl on an endless loop, than make an open market purchase of their own stock.

4.  Technology executives are supposed to sell stock all the time.  They are compensated with stock options, don’t let their sales be off-putting to you in and of themselves.

5.  Don’t be too excited about share buybacks until you compare them with stock option awards, as buybacks are sometimes used to cancel out this dilution.  This is the main reason Cisco Systems has traded and will always trade in the same price range for the rest of your natural life, despite buying back billions in shares each year.

6.  Be suspicious of multiple insiders buying at the same time in small increments as these purchases may end up looking merely symbolic in hindsight, especially when the company ends up dropping an earnings bomb.

7.  Distinguish between options being exercised and open market purchases.  A CEO being handed shares is meangless for investors, a CEO putting up his own capital may be meaningful.

8.  Insiders do stupid things all the time, they are human.  For some reference points, examine the insider buys in Bear Stearns stock  in the months leading to the collapse.  You can also look at the margin mess created by Aubrey Maclendon in shares of Chesapeake Energy – the man almost lost his entire stake in his company because of leveraged stock holdings.  Had you followed Sumner Redstone’s purchases of Midway Games, you’d have bought the stock from 4 to 17 to zero over the course of 9 years.

9.  I avoid the stocks of executives who go on TV and speak promotionally while dumping larger-than-normal blocks of their own stock.  This is because I’m street smart and Street smart.  It’s not always the right thing to do, but I sure feel better.

10.  There has never been a conclusive study done that proves any direct correlation between the major market indices and the presence of either insider buying or insider selling in the aggregate.  This information is much more valuable for assessing individual stocks than the broader markets.

Source:

Insider Buying/Selling: The Collected Wisdom of a Thousand Heartbreaks (TRB)