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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 (NYSE:CRM) and Linkedin (NYSE: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 (NASDAQ: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%.

Source: Insider Trades: Opportunity Or Sham?