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I am pleased to introduce a new weekly service called Insider Weekends that highlights buying and selling of stock by company insiders. Numerous academic studies have found that insiders as a whole tend to outperform the general market. A 2007 study by Alan D. Jagolinzer, an assistant professor at the Stanford University Graduate School of Business, found that even insiders that were enrolled in “automated” 10b5-1 plans where they periodically sell certain amounts of stocks according to the plan, managed to beat the market by 6% over a six month period primarily through trades they could cancel under this plan. This study prompted the SEC to review and eventually revise the 10b5-1 plan rules in March 2009.
In a market that appears directionless and bounces from day to day, reviewing insider transactions for opportunities could turn up some gems in the rough. I have personally seen many small and micro cap companies that had strong insider buying near the March 2009 lows go on to become 10 baggers.
Insiders may sell for a number of reasons including the purchase of a new home, paying for education or in some instances simply to diversify their holdings. The selling may not necessarily imply that they view the near term prospects of their company negatively. On the other hand, insider buying often implies better prospects for the company in the future or a stock that in the insider’s opinion is undervalued.
Sell/Buy Ratio:
The insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by total insider buying in that week. The adjusted ratio for last week was 9.41. In other words, insiders sold more than 9 times as much stock as they purchased. While this might seem large, the Sell/Buy ratio that we calculated for the last several weeks since we started collecting this data has been much higher and was an astounding 68 in the last week of April. The last week of April is when the market began its recent correction as you can see from the chart of the S&P 500 index below. We are calculating an adjusted ratio by removing all funds and trying as best as possible only to retain information about insiders and 10% owners who are not funds.