- Insiders are buying after a six month price increase of 10%.
- A wide range of insiders increased their holdings.
- CFO increased position by a large %.
- Overall insider buying profile indicates positive future performance.
After James. S. Crown, Independent Director at JPMorgan Chase & Co (NYSE:JPM), recently bought in excess of $20 million worth of shares in the company, the financial firm popped up on my insider trading screen.
Academic studies based on US data show that insiders are better informed and earn abnormal returns [Lorie and Niederhofer (1968), Jaffe (1974)*, Seyhun (1986), Rozeff and Zaman (1988), Lin and Howe (1990) and Lakonishok and Lee (2001)]. Using Oslo Stock Exchange data Eckbo and Smith (1998) show that insiders do not earn abnormal returns while Jeng, Metrick and Zeckhauser (2003) show that abnormal returns earned by insiders are restricted only to purchases.
Insider Trading Checklist
To gain further insight I examined the insider trading history at the company over the past 12 months. Because of the potential for outperformance I'm highly interested in insider trading and set up a checklist to determine the level of attractiveness of a particular insider trading signal.
An important source of inspiration to set up my insider trading checklist has been the writing of George Muzea, an insider trading expert (advising Stanley Druckenmiller among others) but I've also included ideas from other investment gurus and research papers.
The checklist is based on insider trading data over the past 12 months as provided by Morningstar unless otherwise noted.
|Positive Insider Buying Signals||JPM||Notes|
|Buying after 6mnth stock price decline||N/A|
|Buying after 6mnth stock price increase||X|
|Operations Officers Buying||X|
|Female insider buying||X|
|Insider Increasing position by 33% in negative trending stock||N/A|
|Two or more insiders are buying||X|
|Four or more insiders are buying||X|
|Buying insiders have favorable track record||-|
|Negative Insiders Buying Signals||JPM||Notes|
|Selling after 6mnth decline||N/A|
|Selling after 6mnth stock price increase||X||There is also some selling by insiders going on|
To be able to compare insider trading signals objectively I've assigned a weighting to the different variables. I'm in the process of refining this formula but am arriving at a current HIT** score of 60 points.
Because this is the first time I use the score it means very little on its own. However, after calculating additional HIT scores it will provide a valuable benchmark. The score can range anywhere between 5 and 100.
(click to enlarge)
^SPXTR data by YCharts
One important observation is that CFO Marianne Lake increased her position by ~250% over the past year to close to a $2 million position. CFO buying is slightly more interesting than the buying of an average insider. Most likely because CFO's have greater insight into the financial position of a company.
Wide range of insiders buying
The famous investor Peter Lynch is of the opinion that a wide range of insiders buying is a positive signal. He is also more interested in buying by Operating Officers. Mainly because they aren't swimming in cash like CEO's. At JPM the COO is increasing his position. Just like many other insiders. The notion that a range of insider buying is positive is shared by Muzea who specifically looks for 4 or more insiders buying.
Unfortunately not all signs are green. There are also a few insiders who decreased their holdings recently. However, there is only one insider (director) who decreased her position over the past 12 months.
The insider buying going on at JPM bodes well for the company's future. Insiders are buying even as the stock followed the market's recent surge. Executives at different levels and responsible for different parts of its business are buying. Only one insider decreased ownership in the company over the past twelve months. After running the insider buying through my checklist I expect the company to outperform the market over the next 12 months. A HIT-score of 60 is likely to be an above average score. Although it may be unwise to rely on insider buying by itself I do view it as a strong positive in a stock review.
* Jaffe, J.F. 1974. "Special Information and Insider Trading." Journal of Business, vol. 47, no. 3 (July):410-428.
** HIT-score or Haas Insider Trading is a formula I'm developing to be able to rate the strength of Insider Trading signals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.