What insider ‘buys’ and ‘sells’ are telling you
While researching a stock, you might have access to real-time trading data, or deep analysis from your discount brokerage service provider, but the information you receive is often “second hand”. Insiders in the company on the other hand usually are in the driving seat, because they have a front-row seat of what’s going on from within. You could therefore learn a lot about whether to buy, sell or hold a stock if you use insider trading activity to supplement your other research.
An insider view
Some traders and advisers believe that looking at insider behavior over the short-term might give you a greater insight of what to do with your stock. A good yardstick is said to be a 3-month view. For instance, there are those that advocate using a PASS/FAIL grading methodology in order to help you invest like an insider. The crux of the advice goes something like this:
- PASS: If net insider trading activity over the past 3 months is positive (more buys than sells), then the stock deserves an insider trading activity grade of PASS
- FAIL: Conversely, if more stocks have been sold by insiders than have been bought during that timeframe, then the stock deserves a FAIL grade
If you are more into trading (as opposed to buying and holding for several months) stocks in a matter of days/weeks, then you could use this same methodology – but over a shorter timeframe – perhaps 30 days.
So, how can we apply these guiding principles to specific stocks that are in the news of late.
Facebook, INC (FB)
According to publicly available data from sources like the NASDAQ website, our 3-month rule indicates that FB could be rated as a PASS – but just barely. As of writing this piece, there have been a total of 172 insider trades, an overwhelming majority of which (99) have been Sells. However, there have also been 73 Buys over the last 3 months. So, in terms of the number of insider trades, FB would likely be classified as a Sell or Hold.
When we look at the volume of shares bought by insiders over the last 3-months, they amount to 35,192,584. However, there were 31,175,943 shares sold during that period. That’s a net positive of 4,016,641 more shares bought than sold. So, based on the number of shares traded by insiders, using our 30-day Net activity rule, FB should be a Buy or Hold.
Over the most recent 30-day period, FB insiders sold 6,494,000 shares at an average price of around $201.12, amounting to roughly $1,306,074,000 in market value. Those insider transactions should give short-term traders some indication on which way the wind is blowing on FB.
On a longer-term view however, the numbers stack up against buying or holding FB, with 284 Sell trades executed over the past 12-months, compared to just 188 Buy trades. In terms of Net activity, there were 2,054,153 more sells than buys over the course of the year. That would (strictly speaking) put FB firmly into the Sell category.
Walgreens Boots Alliance Inc (WBA)
If you are thinking of buying, based on insider trading patterns, then perhaps WBA might be worth looking at. Let’s use our Net Activity rule to make that case.
Over the last 3-months, there have been just 2 insider Buy transactions, and an equal number of Sell trades in WBA stock. The volume of shares bought (3,397,438) far outweighed the number sold (1,700,174) during that timeframe. This yields a net positive trading activity of 1,697,264 shares – which would give WBA a PASS and put it into the Buy/Hold category based on our Net Activity rule.
In the past 30-days, WBA insiders bought 3,397,000 shares at an average price of $64.54, amounting to a trading value of roughly $219,255,000.
But what about a longer-term view? Well, over a 12-month review period, 10 Buy transactions occurred, for a corresponding 8 Sells. The volume of shares was 3,619,457 buys versus 1,837,964 sells, resulting in a net positive of 1,781,493 shares bought by insiders. And that would signal a Buy for WBA.
So, is it a wise move to follow the insiders when making portfolio decisions? The short answer is YES – follow them, but don’t blindly follow!
Legendary investor Peter Lynch, of Fidelity Investments fame, is quoted as saying:
“The insider has only one reason to buy: to make money!”
And on another occasion the Guru said this about insider buying:
“A company, will rarely go bust in the face of heavy insider buying”
Wiser words were probably never spoken. If you are inclined to mimic your investing/trading based on the “Do as the insiders do” philosophy, then you would do well to buy WBA and sell (or at least Hold/wait-and-see) FB – at least in the short-term. The price move chart below illustrates that point amply.
However, we must caution you against making insider trading activity your sole metric for trading/investment decisions. You’ll need to consider fundamental, technical and seasonal factors too. But most importantly, understand that the Buy/Sell activity reported by public sites shouldn’t be taken for granted. Some of those trades are made are not indicative of what insiders think about the stock, but as a result of company policy (compensation etc.) or legislative requirements (tax selling etc.).
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Author does not have investment in stock discussed in this article.