We already know that one of the best buy-strategies you can follow is to buy a stock when insiders are buying. Even better, when there is not only one insider of a company buys but when you see cluster buying. Why? Because they have access to all sorts of non-public information, such as:
– The direction of sales since the last quarterly report
– New products and services in development
– Detailed expansion plans
– Potential mergers and acquisitions
– Loss or gain of key customers
– The status of outstanding litigation
– Whether the company will put itself up for sale
– Plans to take the company private
– Plenty of other important information and details unavailable to the private investor.
It takes real guts to buy stocks in a market as volatile as this one. Millions of investors have bailed out of stocks over the past few weeks because they couldn’t take the pain anymore. But insiders have purchased stock in record numbers recently and the private investor is doing the exact opposite. When insiders start buying with their own money at current market prices again, may be this is a sign that the typical punter should do so, too.
It seems that corporate insiders couldn’t watch their company’s shares selling at these prices and just sitting on the fence. Recent data reveals that corporate insiders whose purchases correctly signalled the bottom in 2020 and other bear markets are bottom-fishing now. More than 1,100 corporate executives and officers snapped up shares of their own firms in May alone. It was the biggest ratio of buyers to sellers since March 2020, the last bear market bottom.
Bloomberg noted that the insider buy-sell ratio also jumped in August 2015 and late 2018, with the former preceding a market bottom and the latter coinciding with one. Yet the spike in insider purchases coincided with investors pulling cash from their equity funds. The punters are acting emotionally and the insiders purely on numbers, analysis and reasons.
While plenty of academic studies have confirmed that stocks with heavy insider buying tend to outperform the broad market in the months that follow also an increased insider buy-sell ratio can indicate a bottom.
Instead of more selling, we should consider to start adding positions to our long term portfolio.
Sven Franssen