Informativeness of insider transactions

Everyday thousands of insider trades occur. Insiders can only use public information but their advantage is the interpretation of this data.

Insider trading activity is not a magic potion. Many newsletters have failed to justify their existence and have folded by solely relying or simply misinterpreting the information. But having said this historical results has demonstrated if used properly insider trading data does contain predictive information and can serve as a catalyst for the stock price.

If analyzed correctly trading by insiders should help convey directional information about a company’s stock price.

A summary of key points

Insiders have a better understanding of their business economics and top executives (CEO, CFO) have the most accurate record

Purchases reveal more information than sales. Multiple insider sales with a high short position reveal negatives.

Agreement by multiple insiders increases the predictive information of trades

The magnitude of transactions is important including number of shares and net value

Multiple buys over time with no sales increases the transactions information

Current purchase in one month increases the probability of purchase for the next month

Smaller companies with activity provide more information given they are less efficiently priced.

Only analyze open market transactions, ignore private transactions

Insider activity within industries such as biotechnology may provide more predictive power. The thesis is management understands the science and future possibilities of new drug breakthroughs or ability to pass future FDA hurdles

The results of the 03/24 post for March positive insider activity was as follows
take a look

I ran a query for positive insider activity for the one week ended 04/03/09

Stocks that have excellent value for different reasons were

NUTR $6.99
Nutraceutical Int'l Corp.
Drug Related Products

PRPX $6.38
Portec Rail Products, Inc.

PRLS $1.80
Peerless Systems Corp.
Computers Wholesale

QLTI $1.78
QLT Inc. (USA)

Price Quotes for the above

Quotes on the above

click for additional information


Carrigaline said...

Reminds of a quote by a certain legendary investor.

"Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise" - Peter Lynch

ShadowStock said...

Yes, but there are times insiders will mislead with small buys to set up a large sale. I try and wrap some of the insider buys with value before I purchase. Or in the case of biotechnology I will dig into other factors like compensation, capital structure and management’s credential when possible. Thanks for the comments.


jimmymac said...

Thought you would be interested in this info on Warren Kanders


ShadowStock said...

Hi jimmymac

Very interesting!

Its disappointing that Kanders is so self serving

I have positions in both CLRS.PK and SIDG.PK.

Thanks for this useful insight.