Data on trades made by company insiders-key executives and directors-demonstrates to Ted Dixon, co-founder and CEO of INK Research, that most of them are contrarian in their approach. Lately, Dixon finds that insider indicators in the gold and junior gold miner sectors are "off the charts." In this interview with The Gold Report, Dixon shares the names of frequent traders in recent months, along with insights into why, when and how insiders are trading.
The Gold Report: Ted, INK Research monitors stock transactions made by key executives and directors inside their companies and uses that data to develop sentiment indicators for various indices and sectors. How does your system work?
Ted Dixon: When we look at a market and a sector, we use insider activity-buys and sells in the public market-to get a sense of how those insiders feel, not just about their company, but about the overall market or sector. This led us to develop what we call a sentiment indicator, which is basically a daily poll of insiders. You could compare it to the polls you see during election campaigns. Every night, we take a poll of what insiders are doing within the market and the sector. We aggregate all of the buys and sells in the different companies in that sector to get a sense of the overall mood of insiders in that area.
TGR: The sentiment indicators at the moment show almost twice as much insider buying among Toronto Stock Exchange-listed stocks as selling. Yet, the opposite is happening in the American market. How do you explain that?
TD: One of the rules of thumb when looking at insider activity is that insiders tend to be contrarian. They like to do the opposite of what other people are doing.
In 2013 to date, the U.S. market has had a nice run as the indices have been hitting new, all-time highs. As everyone else is piling into the market and chasing momentum, insiders, being contrarians, are selling into that and are taking profits.
We have not had quite the same ride here in Canada; different sectors have experienced different fortunes. Some sectors and stocks have been hit hard. Because they are contrarian, insiders will go shopping for bargains during periods of sell-off. While everyone is hitting the sell button, insiders and select companies will pick up stocks that have been beaten down. The key element to keep in mind here is the time horizon. Insiders typically have a long time horizon. The fact that they may be buying does not mean they expect a 50% reversal over the next two or three months. It means that, over the long term, the risk-reward ratio has improved enough for them to jump in.
TGR: Among the TSX Venture Exchange-listed stocks, insiders are buying almost eight times more than they are selling. What trends have emerged from insider buying on the Venture Exchange?
TD: Before the Lehman Brothers collapse, insiders were a bit more opportunistic in their buying and selling. Since then, we have seen a long-term, secular commitment to buy among junior miner insiders. This has been going on for quite a while, but as we go through bouts of sell-off in the sector, insider activity within the junior miners tends to pick up. That is happening now.
In fact, it would concern us if there were no increase in insider activity when junior miners sold off. That might indicate that insiders are giving up on the sector. We are not seeing that.
TGR: Where is your Venture Exchange sentiment indicator on a 12-month horizon?
TD: It is near all-time highs, just as the Venture Exchange index works down toward new multiyear lows. We have been at elevated buying levels, driven primarily in the gold group. The spring saw a massive spike.
TGR: Does a spike in insider buying in an underperforming sector generally predict medium- or long-term equity performance?
TD: It is important to remember that insider activity and the INK indicators are not a silver bullet to market timing. They are used in conjunction with the technical indicators that many of your readers follow and the fundamental research they do.
It is important to look at insider activity during a major sell-off correction or a major rally: What are the insiders doing? Is insider activity spiking, suggesting a turning point is near?
Right now, we see a major move to the downside in commodity stocks and a major spike in insider buying. That is also what happened in December 2008. It is almost as if the mining industry is going through its own Lehman Brothers moment. Our indicators suggest now is the time to be bargain hunting for good companies. The time to exit the industry was a while ago.
TGR: Did you notice a significant change in insider buying or selling in the gold sector when gold had that significant sell-off in April?
TD: Absolutely. When gold sold off in April, our indicator for the gold group jumped substantially. It got as high as 10:1, meaning 10 gold companies had key insider buying for every one that was selling. That is an astronomically high level of buying.
We had another test of that in early June when we saw renewed weakness in the gold stock indices and the gold price. Buying picked up. Insiders seem to be suggesting that they are very interested as the S&P/TSX Gold Composite Index toys with the 1,500 level.
TGR: Is there any seasonality at play, given the adage "sell in May and go away?" Or, has it changed to "buy in May?"
TD: I think price level is the key factor, not the month of the year. In the U.S., there was a nice rally into May, and we saw a lot of insider selling across the board. In Canada, among the miners, prices have tumbled to a level that is attracting significant insider interest.
TGR: It is also meaningful that, in the junior mining sector, when an executive adds to his or her position in a smaller company it can mean a significant percentage of ownership; for a larger company, it is often a drop in the bucket. What are some recent examples in the junior gold space where an executive has exercised options or bought shares that resulted in a significant increase in his or her stake in the company?
TD: You are absolutely right about the importance for smaller companies, Brian. When Nejat Seyhun did his comprehensive study of insider activity in 1998, "Investment Intelligence from Insider Trading," he found that top executives such as CEOs and CFOs of smaller firms outperform the market by about 8% a year.
You get a better bang for your buck, on average, with smaller companies. I say on average, because in some cases insiders still suffer from wishful thinking and miscalculation.
Most of the insider buying is in the junior and the small companies. We have an indicator list that tracks what we call key insider buying-beneficial ownership buying where officers or directors directly own the interest in those stocks; they are not managing other people's money. Our users can also generate net buying lists.
TGR: What are some of the smaller names on your 30-day activity list, meaning there has been insider trading in the last 30 days?
Remember, because these are small companies, some small gold miners may not be easy to invest in, as a matter of liquidity. Some may not trade much. Nor are these investment recommendations. They are companies on our list showing insider buying in the last month.
TGR: Veris Gold insiders bought 555,000 shares.
TD: As of June 10, it was 605,000 shares.
TGR: In general, do you know who is making such purchases?
TD: In the case of Belo Sun Mining, CEO Mark Eaton has been buying. He bought throughout the month of May: 2,000 shares on May 30 and 425,500 on May 15-16. Another company executive bought nearly 230,000 shares on May 31 at $0.59/share after buying 11,500 shares earlier in the month. All my dollar and cents figures are in Canadian currency. On May 16, a third officer bought 100,000 shares. That makes three insiders buying in the public market during May. During that same period, there were no insider public-market sales. That is a good example of the type of insider buying you want to see when there is market weakness in a stock.
TGR: Have you ever done a study of share price performance versus buying? Is there a greater correlation with more executives buying than with just one buyer?
TD: In general, the more, the better. You want to see situations where multiple insiders are buying and no one is selling.
When the CFO is buying is another good signal. Always keep an eye on what the CFO is doing. I say that because, in general, they tend to be more conservative.
TGR: Can you tell us about other companies where insiders are buying?
TD: Centerra Gold Inc. CAGDF.PK, based in the Kyrgyz Republic, has gone through quite a news cycle over the past few weeks. Mine production, I believe, is expected to be restarted after some political events there. But we see some insider activity in that company as well.
Centerra is a high-risk stock. What the insiders seem to be signaling there is that perhaps the stock price has overshot the risks. Even when insiders are buying, you still have to look at the stock's risk profile to see if it is something you want to get into. Just because insiders are buying does not mean the stock is not risky. It sends a signal related to the risk-reward outlook on average. The risk level may still be quite elevated.
TGR: Are well-known CEOs or executives buying the junior companies, people like Ross Beaty?
TD: Ross Beaty's latest purchase was in the alternate energy area. Maybe that is a story for another day. And of course, we have talked about other CEOs who have been buying.
TGR: Are there any mid-cap names that stand out?
TD: Centerra and Luna Gold (OTCPK:LGCUF) would be in that category.
It is nice to see some emerging investor interest in the sector beyond the insiders. Lately, the news flow has been so negative that sometimes it sounds as if only insiders are interested in their companies' stocks.
TGR: There also is activity in some of the gold sector's biggest names. Who is buying there?
TD: Peter Munk, chairman of Barrick Gold Corp. (NYSE:ABX), has come back to the market. He bought 100,000 shares worth $2.1 million at $21.05/share on May 9.
TGR: Are other Barrick Gold executives buying its shares?
TD: In the last 60 days, Peter Munk is the only insider with public-market buying at the firm.
Compensation schemes at larger companies are structured a little differently than smaller companies. At Goldcorp, insider holdings have been on the rise through a combination of net public market activity and compensation-related acquisitions. It is nice to see insiders building their positions at these levels. Even though some of it is compensation-related, that is what we would like to see and are seeing in Goldcorp.
TGR: Are you seeing any other insider buying at the big gold names?
TD: There has been some net buying at Kinross Gold Corp. (NYSE:KGC) and there has been a fair amount of insider activity at IAMGOLD Corp. (NYSE:IAG). It is in fourth place on our list of direct insider buying over the last month. Over the last 90 days, IAMGOLD insiders have spent $504,778 buying shares in the public market. Notably, both the CEO and CFO have been buying shares. That is a positive contrarian signal for longer-term investors with the right risk tolerance.
TGR: How do your subscribers use your research?
TD: One of the most popular ways of using INK is to look at what insiders are doing with their options, both when they are being granted in some of the smaller companies and when they are exercised. Do they sell all their shares? Do they hang on to all or some of them?
That is particularly important in some of the mid- to larger-cap companies. We want to see if they are exercising options and not selling. That is why we are encouraged by what we see at Goldcorp (NYSE:GG). A lot of the Goldcorp activity is compensation-related acquisitions. It is encouraging to see insiders building their positions.
That said, sometimes insiders have to sell a portion of their compensation-related awards to pay taxes and the exercise costs, depending on the plan. There is no real standard in how compensation plans are structured. It is important to dig down into the details. We like to see insiders paying their taxes or exercise costs and then hold on.
TGR: What are the best ways to use the information INK provides?
TD: Three rules of thumb. First, good things come in small packages. Small companies are where you will get the most bang for the buck following insider activity.
Second, insiders usually go against the flow. They are contrarian. When a stock is falling, it is a good signal if insiders are buying.
Third, sometimes insiders go with the flow. When they are selling when everyone else is selling, that typically is not good news. When they are buying when other people are buying, it is usually pretty good news.
TGR: And four and five would be to follow the CFO and look for multiple executives buying.
TD: Right. Multiple executives buying along with the CFO indicates a good situation, especially if it is real discretionary buying as opposed to stock awards. If we see the CFO and other executives buying during a sell-off, we have more confidence in that signal than if it is a single insider.
TGR: Investors in the gold space and the junior gold space have been beaten and battered. Can you leave them with something that might raise their spirits?
TD: For contrarians, the best time, up until now, to buy junior gold miners was November and December 2008. However, in the wake of the recent pullback, our insider indicators are off the charts. The time to start looking for bargains is when everyone has left the room, not when your next-door neighbor is talking about the latest gold stock he or she bought.
TGR: Ted, thank you for your time and your insights.
This interview was conducted by Brian Sylvester of The Gold Report.
Ted Dixon is co-founder of INK Research; INK stands for Insider News and Knowledge and is Canada's first online financial news and research service providing investor insight into what public company executives and significant shareholders are doing with their ownership interests. INK is also first in North America to provide a free source of insider trading alerts and reports across both the U.S. and Canadian stock markets. Free INK services are found on CanadianInsider.com and InsiderTracking.com. Dixon has also lectured in corporate finance at the British Columbia Institute of Technology. Before starting INK, he worked at the Connor, Clark & Lunn Financial Group where his responsibilities included portfolio strategy and product development. He has also been an analyst at the Fraser Institute and a treasury specialist at TD Bank. In the early days, he was a floor trader on the Vancouver Stock Exchange. Dixon is a Chartered Financial Analyst and member of CFA Vancouver [formerly The Vancouver Society of Financial Analysts]. He holds a Master of Business Administration in financial management from the University of Chicago and a Bachelor of Commerce from the University of British Columbia.
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