Insider Trading - How it Works and Some Companies to Watch

by: SA Eli Hoffmann

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

MARKET MOVERS: Buy Signs From the Top Ranks

  • Summary: SEC insider trading statistics track executives buys and sells of their company's shares. They are closely by analysts and traders, who figure insiders must have the best idea of when to buy and when to sell. Keep in mind: The vast majority of insider trading is selling, done automatically by brokers to help their executive clients diversify, and not sentiment based. Buying is usually based on sentiment, and is taken as a sign the insiders feel their stock is a worthwhile investment at current prices (although buying can also be sparked by the vesting-date of stock options in executive compensation packages). Recently the sell/buy ratio tightened to 11.4—meaning $11.40 in stock sold for every $1 bought. Analysts consider anything under 20 to be bullish, all the more so when general sentiment is mixed, the economy's health is questionable, and the future of interest rates is still up in the air. Broken down by sector: Large caps: 10.77. Mid caps: 31.26. Small caps: 21.48. Investors explore insider-trading data looking for bargains in individual stocks; some money managers give it up to 15% weight in their overall decision. Certain sectors are cited as having more credible insider know-how than others, such as financial services. Companies currently displaying the most bullish insider activity: Sovereign Bancorp Inc. (SOV), TD Ameritrade Holding Corp. (NASDAQ:AMTD), and Avid Technology Inc. (NASDAQ:AVID). Companies currently displaying the most bearish insider activity: Google Inc. (NASDAQ:GOOG), Inc. (NYSE:CRM), MKS Instruments Inc. (NASDAQ:MKSI).
  • Comment on related stocks/ETFs: In a recent interview, Michael Dell commented on his recently becoming an aggressive buyer of Dell Inc. (NASDAQ:DELL) stock. However, to take even aggressive insider buying as a sure-fire buy signal can be hazardous; sometimes insiders deliberately inflate stock prices to squeeze shorts, using their own stock as collateral against bank loans! The Unknown Professor recently posted an article that analyzes the profitability of insider-trading research in mergers and takeovers. InsiderScore frequently posts buy and sell ideas based on insider-trading research.