Tuesday, May 3, 2011

Experimenting with Insider Transactions

This is experimental and I have no expectation other than hope to think that this thought process will work. I am experimenting with a method to use insider transactions as a way to pick stocks to watch.

Reasoning:  According to Motley Fool , "Executives who own 30% of a company, for example, are motivated to make it succeed. The best employees and executives work harder when they work for themselves. As shareholders, they can see a significant correlation between their efforts on the job and their compensation. Insiders buying shares is also usually a good sign, as it means they expect the shares to rise."

Investors believe corporate insiders may have better insights into the health of a corporation than analysts or the general public. "Further, insider buys are especially useful. Since insiders have exclusive information on the company performance, if they are risking their own money on the stock, usually they should have good reasons, especially when several insiders buy the stock at the same time"

First Attempt:
-- Using Finviz.com stock screener, I set inside ownership to [ over 30% ] and left everything else as [ any ].  I went to the Ownership Tab and sorted in descending order the owner's insider transactions field.

Result: I found the insider transactions were not broken down into individual specific data and showed aggregate totals.

Second Attempt:
-- Find a screener that gives good line item transactions --
I found several websites that had good screener programs and large databases with significant historical transactions. All seem to have their own proprietary methods of aggregating and differentiating insiders.

http://www.insiderinsights.com/detailed/screens.php -- jonathan moreland methodology
http://www.insider-monitor.com/resource.html (real-time website)
http://www.secform4.com/i-ratios.htm (real-time website)
http://finance.yahoo.com -- general finance site

From www.secform4.com:

  1. Number of Insider Buy/Sell Ratio: Ratio between the total buy filings and the total sale filings.
  2. Daily Insider Net Buy/Sell Ratio: Ratio between daily net buying and net selling (in dollar amount).

Finding that the information is inconsistent and varies from site to site. I believe that these transaction should be filtered through more subtle means.

Yahoo defines insiders as:
"An insider is an officer, director, person with a policy-making role, or beneficial owner (holder of 10% or more) of a company's stock. Insiders are both individuals and corporations, and are required to report these holdings:
  • Direct Holdings: Holdings that are held in the name of the insider.
  • and
  • Indirect Holdings: Holdings that are indirectly controlled by the insider, and are held by another entity, such as a family member, a trust, a company plan, or even a corporation to which the insider is affiliated. In many cases, the same block of indirect stock might be claimed by several insiders, such as a group of trustees over the same trust, or several partners in the same partnership. Some insiders hold all of their stock indirectly."

Jonathan Moreland goes into significant subtle detail on how different transactions are meaningful.

George Muzea has also written a book about the subtle different types of insiders. Just as there exist value & momentum investors, there also exist value insiders & "catalytic insiders".

Third Attempt:
-- Read and study --
In reading and studying about insider transactions, George Muzea - "The vital few vs the trivial many" gave us six insights to consider:
look for de
"1. Insiders normally buy into price weakness and sell into price strength; therefore it is important to look for deviations from this behavior.
2. Stocks that have insider selling (three or more insiders) into price weakness should be considered seriously as candidates to sell.
3. Insider trading by operating officers is more predictive than those of other insiders, especially outside directors.
4. When analyzing insider trading, it is important to observe previous trading patterns to see if the current trade is in line with or a divergence from normal behavior.
5. When insiders buy stocks that are depressed in price and out of favor, much of the time the buying is a sign of value, but sometimes it is simply designed to ignite investor confidence. The best way to determine which is which is to review carefully the dollar value of the purchases. If the insiders had sold previously at higher levels, they should be buying back at least 25 percent of what they sold; otherwise, they could be window dressing.
6. Most of the time one should look for clusters of insider buyers who have all made decisions to buy stock in their companies. However, sometimes a single trade can be predictive, especially when the buying insider has a good trading history in that stock or the purchase is an unusual divergence from past behavior."

Insider Information Video -- Experts

Reaching a Conclusion - Ratios: As in all things, there is more to a inside transaction than just comparing past numbers. Most of these database website are deriving their information by comparing trading patterns from 2 year or longer past history. You could not duplicate their effort from a simple stock screening. You cannot match the power of the different website historical data mentioned above.

George%20Muzea states"It is important to understand that insiders really have only about a six-month visibility on their company’s prospects. They have a good handle on business conditions for about two quarters. However, beyond that they are guessing just like everyone else."

Therefore a simple ratio would be better to quantify the transaction size and significance, after doing due diligence on the individual insider. www.secform4.com ratios were a good start, but what if you did the following?

1) Just as a "short interest ratio" is derived by dividing the number of shares sold short, divided by the average daily trading volume. You could take a insider transaction and create a ratio of number of shares transacted, divided by average daily trading volume. 


2) Float is the number of shares not owned by insiders, therefore  what is the % transaction to the float shares?

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