Tracking Insider Trading: How to Pick a Winner in a Down Market
by Alexander Green, Investment U Investment Director
Monday, February 9, 2009: Issue #931
Last year was a disaster for most stock market investors. The S&P 500 fell 38%, its worst year since 1931.
The worst damage occurred in the fourth quarter. And the first quarter of this year isn't looking much different.
We're back within spitting distance of the November 20 low.
Yet I know a number of stock traders who are making good money right now. How? By tracking insider trading...
Tracking Insider Trading - Getting Started
The easiest way to begin tracking insider stock trading is to watch what top executives and board members are doing, as they have access to all sorts of material, non-public information. They know:
- The direction of sales since the last quarterly report.
- Whether there are any new products or services in development.
- If the company has gained or lost any major customers.
- Whether there is any takeover interest in the company - or whether anyone is talking about taking it private.
In short, they have a huge advantage when they go into the market to trade. That is why Uncle Sam requires them to file a Form 4 with the SEC - electronically - within two business days of any purchase or sale of their companies' shares.
This information is pure gold. Let me give you an example.
A few weeks ago, David Abrams, a Director of Crown Castle International (NYSE: CCI) made the single-largest insider purchase in the nation. He bought 4.5 million shares at a cost of more than $60 million.
Based in Houston, Crown Castle leases cell towers and antenna space to wireless communications companies. Most of these are in the United States, although more than 1,400 are in Australia.
- The company has more than 24,00 towers in prime markets and is actively building more to lease.
- Recent earnings, released earlier in the month, contained few surprises.
- While earnings were in the red, revenue was still growing at 9%. And I noticed that site rental revenue, gross margins and recurring cash flow all exceeded expectations.
- Moreover, the company had lost three-quarters of its market value and was selling below book value.
Finding Insider Trading Buying Opportunities
This looked like an insider trading buying opportunity.
We had no idea that the market would only grind lower in the weeks just ahead of us.
But it didn't matter. Eight weeks later we stopped out of the stock with a 58% gain. (Along the way, we also locked in profits of 135% and 235.8% in the April $15 calls.)
Is it always this easy? Of course not.
Tracking Insider Trading - Due Diligence Is Required
When tracking insider trading due diligence is required, in particular, you need to find out:
- How many insiders are purchasing,
- How much they're buying,
- And what their past track records are.
These are all key.
But it is hard to get a more clear-cut buy signal than when you see top executives buying significant amounts of their own companies' stock, with their own money, at current market prices.
Right now I'm seeing record amounts of insider purchases at many companies.
Some investors complain that these insiders have a huge advantage over ordinary investors. I agree.
That's why you should watch what they do very closely. And, when the fundamentals are right, climb on board.
Today's Investment U Crib Sheet
How to Recognize Red Flags from Insider Trading
For lots of reasons, there are typically about 15 shares sold by insiders for every share bought. Investors unaware of this fact often find themselves in a panic when they realize how much insider trading is going on at the companies they own.
Usually, their fears are unfounded.
However, sometimes there are good reasons for concern. Particularly if the insiders are selling heavily into a declining share price.
As negative indicators go, this one is a bell-ringer. It sends the message loud and clear that the people who run the company want out - and they aren't being terribly particular about the price.
The insiders at Enron, for example, sold 1.1 billion shares in the 12 months leading up to the company's bankruptcy filing. A jury clearly believed that Ken Lay and his pals knew what they were doing.