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Flip floppers don’t have a good reputation in politics as people like to see their politicians hold fast to a set of principles or beliefs instead of changing them on a whim. The reality is unfortunately far different from people’s expectations of their elected officials.
Flip flopping among company insiders is rarer as insiders who were buying shares on the open market, don’t all of a sudden start selling. Nor are you likely to see chronic sellers turn into buyers of their company’s stock.
Besides the signal this kind of behavior would send to the market, the other reason for this reluctance to switch sides has to do with the SEC. The SEC does not want insiders to engage in short-term trading and requires them to give back any profits from trades that happened within a six month period.
This is called the “short-swing profit rule”. Section 16(b) of the Securities Exchange Act of 1934 states that if an insider of a public company buys and sells, or on the other hand sells and buys, stock of the company within a six-month period, they have to disgorge profits from these “matching” trades to the company.
The rule is used to discourage insiders from using the information they possess to make short-term profits. Every once in a while, we come across insider transactions where the insider indicates that the transaction violates the Short-Swing Profit rule. In most of these cases, the footnotes of the filing indicate that the insider is going to return any profits from the prior trade back to the company. Flip flopping insiders are sending us a signal that they think the prevailing winds have changed and that they are willing to give up some short-term profits to make even more money down the road.
After redesigning the InsideArbitrage website in January, we have been busy working on several projects and are happy to announce the launch of two new features for premium members today.
The Flip Flopper is a premium screen that identifies insiders who purchased and sold shares within a period of time. For example they purchased shares on January 3, 2023 and sold those shares by April 28, 2023. The screen also identifies insiders that were selling and then suddenly flip to buying instead. While this screen is in a beta, it is available for all users of InsideArbitrage.
Looking through the list of transactions that qualified under this screen, it was interesting to see that a Director of microcap medical devices company Vicarious Surgical (RBOT) stopped selling in November 2022 and has been instead buying consistently for the last two months.
The footnotes of the February 8, 2023 form 4 filing indicates that the insider was aware of the short-swing profit rule but decided to proceed with buying anyways, agreeing to forfeit any profits from the “matching transaction” back to the company. The footnote states:
The Reporting Person’s purchase of the Issuer’s Class A common stock reported herein was matchable under Section 16(b) of the Securities Exchange Act of 1934, as amended. The Reporting Person has agreed to pay to the Issuer, upon confirmation of settlement of the transaction, the full amount of the profit realized in connection with the transaction.
Vicarious Surgical is a Waltham, Massachusetts company that builds surgical robots that can be used for minimally invasive surgery. Director Philip Liang is a Managing Partner of the VC firm E15 VC that invested in the series A round of Vicarious Surgical and then exited the investment when the company went public in September 2021 by merging with the SPAC D8 Holdings. As is often the case with money losing SPAC business combinations, after an initial spike to over $15, Vicarious Surgical went on to lose most of its value and currently trades for $2.21.
It is surprising to not just see Director Liang’s purchases and the fact that he flip flopped, but that most other insiders including the two co-founders of the company that serve as the CEO and CTO continue selling stock. Clearly Mr. Liang holds a variant perception about the company’s future prospects. Money losing microcap companies are extremely risky and I would approach a company like this with an abundance of caution. We have actually had good success shorting SPAC “science projects” in the InsideArbitrage model portfolio.
The other feature we are rolling out today is Insider Cluster Purchases. This custom screen loads with a set of pre-defined filters such as companies where at least two insiders have purchased shares in the last three months and the companies have a market cap of over $300 million. The screen brings up companies like Charles Schwab (SCHW) where 10 different insiders purchased shares, the aircraft leasing company Air Transport Services Group Inc. (ATSG) where 11 insiders purchased shares and the recent Jefferies (JEF) spin-off Vitesse Energy (VTS) with four different insiders buying shares.
You can play with the filters at the top and customize the screen as you see fit. For example, if I change the screen to display banks with a current market cap over $2 billion that have seen insider buying by at least three different insiders over the last month, I end up with four banks including Valley National Bancorp (VLY), Cullen/Frost Bankers, Inc. (CFR), UMB Financial Corp (UMBF) and First Financial Bankshares Inc (FFIN). While driving to Berkeley last week to meet a friend for lunch, I was listening to Andrew Walker’s podcast with John Maxfield about the banking crisis and one of the banks Mr. Maxfield discussed on that podcast was First Financial.
We would love to hear what you think of these new features. Happy hunting.