Seeking Clues in Insider Transactions

It’s no secret that institutional investors watch a number of factors – data, metrics, movements…call it what you will -- as they look for assurances as well as warning signs on existing investments and try to identify new ones.

The reality is there is no silver bullet, and savvy investors use a number of tools collectively to formulate as full a picture as possible when it comes to the upside and downside potential in a particular security. That said, some are leading indicators while others are lagging, and amid the current economic environment, investors are examining leading indicators to determine what is coming next.

One of those tools is tracking insider activity to see if board members and other executives of a company are buying or dumping shares. Generally speaking, investors look at insider buying activity as a confirming sign for going long the shares. Both insider selling and insider buying are worth watching, but in terms of looking for reasons to say “no” given the current environment, insider selling is the more useful indicator. As the Wall Street logic goes, why should I be buying the shares when insiders are selling?

While this strategy isn't always a sure thing, insider action can be a meaningful tell of what is to come. How useful can tracking insider activity be? Not only is it tracked by mutual funds, hedge funds and Wall Street analysts, there is an ETF that uses it as a key part of its strategy – the Guggenheim Insider Sentiment ETF (TICKER:NFO).

Generally speaking, I’ll watch open market buying and selling, tracking the name of the insider, their relationship to the company, how many shares were traded and at what price. The reporting form, known as Form-4, also gives the dates of an insider’s trades; total holdings of the insider after the transactions; and if they were made on the open market, trades related to the exercise of stock options or some other special reason. Another advantage of Form-4 is that it must be filed with the SEC within two business days, which makes it as close to a real-time indicator as one could hope for.

In terms of tracking insider activity, Yahoo Finance does a good job, as does Insider Insights and Insider Monitor. One of the drawbacks to insider activity information on Yahoo Finance is that you need to know the company in advance, while Insider Insights offers not only that capability, but also tracks which companies are filing Form-4s. Insider Monitor goes one step further and tracks the top 10 insider officer buys and sales of the week and the month.

With corporate earnings for the June quarter kicking into higher gear, it’s always prudent to check insider activity in the weeks leading up to the quarter close to see if there are any investment threads, good or bad, that are worth pulling.

As you roll up your sleeves and dig through the latest insider trades remember to ask yourself this question - Is tracking insider activity the sole way to invest? Not from my perspective, but any good stock detective will tell you it’s another fertile ground for investing clues.