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Quantifying The Insider Edge

As a follow-on to the importance of insider ownership level in considering gold stocks discussed in my previous post, I'll present a little number crunching here. I looked at a bigger sample size of gold stocks than just the 10 listed before with their big out-performance of the HUI to get a better handle on the relation, if any, between insider ownership level, size of company, and stock performance. I tossed out the ultra-microcaps less than $50 million or trading for less than 50 cents. I also tossed out the slower moving majors, with insider percentages typically not much effected by insider buying. I took a sampling of 51 such gold mining stocks from my gold list that trade on US exchanges with SEC standards of reporting. I sliced and diced this group into 3 market cap sizes and plotted their 1 year stock performance vs level of insider interest. Here is the result:

There is much less sensitivity to company size than I was expecting to find. The middleweights move about as fast as the featherweights. There is also little sensitivity to price range. I was expecting to find that as you go down the price range, the heavily insider owned stocks would curve sharply up in gain - down to the trash threshold, which is around $2 for stocks in general, but seems to be more around $1 for gold stocks. When I did a cluster chart for this, however, I got essentially random clutter.

The one big sensitivity that reaches off the page and slaps me in the face is what happens as you go below 2% insider interest level - a huge booby trap for performance. The individual stock performances vary widely, but this is an extremely poor averaging group - to be avoided like the plague. The large size group doesn't fall off as bad as the other two, but their size could be masking decent insider interest in many cases without having the needle moved much in percent. But the smaller companies, where any serious insider interest moves the needle off zero, are poison at these small numbers.

I have three chronic pains in my gold stock line-up in my fund, I call them the three stooges, and when I checked what their number was, sure enough all three stooges were toting less than 2%. That may be the last straw for them.