Corporate Insiders Are Buying, Should We?

Insider buying has always caught my attention throughout my career. I remember in my early days of trading, Aubrey McClendon and Tom Ward were gobbling up Chesapeake Energy stock like I had never seen before. This was back in 2005 when these guys were Chairman and President of $CHK. We would use a website called Form4Oracle, cleverly named after the Form 4 that corporate insiders must file with the SEC when they make purchases and sales of their own company’s stock.

This always made some common sense to me. I figured that these guys knew more about their companies than anyone else, including inside information that we were not privy to. So if they’re buying relentlessly, they’re not doing it because they think the stock goes lower right?

Back in 2005 when McClendon and Ward were loading the boat in $CHK the price of the stock was around 17-18 and they kept buying into the 20s. The stock more than doubled and went to 40 before eventually breakout out again reaching the mid-70s in 2008. “This is easy”, I would say to myself. “Just buy when these guys are buying, duh!”. But then Chesapeake Energy stock came crumbling down and Aubrey was getting margin calls up the wazoo as his shares got back down to the single digits. I was heartbroken. It’s really not as easy as it seems after all.

So now that I’m older, wiser, and more experienced (theoretically), I find it more helpful to look at insider buying/selling as whole. Mark Hulbert put out a great piece over on Marketwatch talking about how the bullish insider behavior recently is pointing to a stock market rally. Vickers Weekly Insider Report, published by Argus Research calculates the ratio of all shares that insiders have recently sold in the open market compared to the number that they’ve purchased.

For the week that ended last Friday, this sell-to-buy ratio stood at 1.58 to 1, which is less than half the average level over the last decade of 3.4 to 1.

At the bull-market high earlier this fall, in contrast, the insiders’ sell-to-buy ratio got as high as 6.86 to 1.

In other words, at least when measured according to this indicator, the insiders are more than four times more optimistic about their companies’ shares now than two months ago. This much insider enthusiasm is a good sign.

In fact, since the bull market that began in March 2009, there have been just three occasions prior to now in which the sell-to-buy ratio dropped below 2 to 1. Each came within a few weeks of a significant low in the market.

We’re actually seeing similar activity in Canada. INK Research monitors the buying and selling activity by corporate officers within their own companies. Their TSX sentiment indicator recently hit 136.6%, up from 120% the prior week. As a comparison, this indicator was below 100 back in October.

The indicator is derived by taking the number of stocks with buy-only transactions over the last 60 days, and dividing that with the number of sell-only transactions. The indicator ignores stocks that have both buying and selling in an effort to give a more accurate reading.

Last Thursday, when the S&P/TSX index was stung with a 118-point loss and the 11,800 level came under attack, insiders were particularly active snapping up stock. There were 121 companies with insider buying versus 40 with selling. This 3-to-1 ratio is unusually high, Mr. Dixon notes.

Insiders in the energy sector seem especially bullish. INK’s energy indicator is now at 283 per cent, up from 263 per cent last week, with the ratio of buyers to sellers the highest of any of the top 10 sectors of the TSX.

Sentiment is just one piece of the puzzle for us. But this is certainly a check mark in the favor of the bulls.



Insider Trading Suggests Market Heading For A Rally (GlobeAndMail)

Insider Behavior Points To Imminent Rally (MarketWatch)