Every few months I get together with a banker friend of mine and we talk about different stocks and investing ideas over a beer. Inevitably, we stew about Salesforce.com (CRM) and Linkedin (LNKD) and their respective sky-high valuations. One justification for their over0blownness always seems to be the ridiculous number of "insider sales". Who knows better about the prospects of a company than the guys running it - right?
After performing some analysis (details below) it seems that the guys running the business know about as much stock price prediction as normal investors. Investing in these companies based solely on insider behavior only gives you exposure to the systematic risk of the broader market.
Insider purchase transactions are a buy signal: Not conclusive
Below are the stocks with insider purchases during the last full week of February. I compared their 90D returns to see the inside buyers did with their investment. Basically, returns were all over the place. I reran the numbers based on an alternate time frame resulting in a very similar result. I'd attribute the actual return to systematic risk and call it a day.
Filter: Actual returns over a 90-day time horizon, taking the total insider buys that occurred Feb 23-24th, 2012 filtered based on total volume (> 10k) and price (> $7).
- Average Return = -4.28%
- S&P Return = -3.1%
- Max: 30% / Min: -39% / Median: -2.02%
Example 1: Insider Buys
Ticker | Company | 2/23/2012 | 5/23/2012 | % Chg | Mkt Cap | Prev 2M |
IPCM | IPC The Hospitalist Co | 37.26 | 34.85 | -6.92% | 734.8M | -24% |
GKNT | Geeknet Inc. | 14.63 | 14.99 | 2.40% | 118.6M | -11% |
D | Dominion Resource | 49.91 | 51.68 | 3.42% | 30.720B | -4% |
GEOY | GeoEye Inc. | 21.33 | 19.43 | -9.78% | 614.1M | -3% |
KO | Coca-Cola Company | 34.11 | 37.02 | 7.86% | 177.2B | -1% |
KMPR | Kemper Corp | 28.53 | 28.8 | 0.94% | 1.770B | -1% |
WIA | Western Asset | 12.67 | 12.83 | 1.25% | 381.0M | 2% |
RTI | RTI International | 23.97 | 24.87 | 3.62% | 704.6M | 2% |
HBNC | Horizon Bancorp | 17.53 | 24.97 | 29.80% | 135.3M | 2% |
TLLP | Tesoro Logistics | 35.71 | 32.55 | -9.71% | 1.281B | 10% |
GHDX | Genomic Health I | 28.28 | 33.2 | 14.82% | 1.064B | 10% |
FDEF | First Defiance Fi | 16.87 | 16.07 | -4.98% | 157.1M | 11% |
GCI | Gannett Co. Inc. | 14.97 | 12.62 | -18.62% | 3.569B | 12% |
BPFH | Boston Private Fi | 9.43 | 8.72 | -8.14% | 786.6M | 14% |
DELL | Dell Inc. | 17.4 | 12.49 | -39.31% | 21.425B | 14% |
SUSS | Susser Holdings Co | 26.52 | 28.96 | 8.43% | 813.1M | 17% |
HWAY | Healthways Inc. | 7.98 | 6.43 | -24.11% | 360.4M | 19% |
MBWM | Mercantile Bank | 12.69 | 14.73 | 13.85% | 145.8M | 24% |
WHR | Whirlpool Corp | 69.86 | 58.96 | -18.49% | 5.558B | 28% |
IDIX | Idenix Pharmaceut | 12.29 | 9.31 | -32.01% | 1.060B | 37% |
Insider selling transactions are a sell signal: Not conclusive
Insider selling transactions exceeded the number of buy transactions significantly (the S&P was up over around 10% over the previous 90 days) leading insiders to perceive the price of their respective stocks as "high". Unfortunately, the volume of transactions prevents me from creating a table, but I think the chart captures the sentiment. As with insider buys, returns varied greatly.
Filter: Actual returns over a 90-day time horizon, taking the total insider sales that occurred Feb. 23-24th, 2012 filtered based on total volume (> 10k) and price (> $7)
- Average Return = -4.06%
- S&P Return = -3.1%
- Max: 56% / Min: -61.5% / Median: -4. 09%
Example 2: Insider Sales - click to enlarge
Conclusion
There are no easy answers. Insider behavior, while theoretically so clear and understandable, is not the simple all-knowing bellwether that works unconditionally. There may be some opportunity here, but only after digging into the data, and hedging for risk (I generally use MPT models like the one found here - MPT) or covered calls/puts.
Feel like gambling anyway?
If I'm looking for a take-away here, I'd point out that insiders sell when they perceive the price as "high", and buy when they perceive the price as "low" (as seen in the volume of buy vs. sell transactions). Looking at what's out there now, we're currently at a point where the market has increased over the past few months, so volumes on insider sales are up (relative to insider buys).
One example where insiders are getting out in a big way is Gaylord Entertainment (GET). It's trading at a 5 yr. high and is due for a pullback. On the Buy side of the coin there's Furiex Pharma (FURX). They've had a tough time but I think they are due for a strong turnaround with a robust pipeline in Phase III trials. I like this company as purely a high upside speculative play, but with a trailing stop to prevent losses over 20%.
Disclosure: I am short LNKD. I have no positions in either GET or FURX, and have no plans to initiate any positions within the next 72 hours.
