SHIFT Daily News


When to Ignore the Insiders

When to Ignore the Insiders
April 04
11:22 2017

(InvestmentU) – Bearish market timers have just about run out of excuses lately.

They said the bull market was old. Yet it refused to retire.

They said the bull market was weak. But every consolidation phase has been followed by another rally.

They say valuations are rich. But perhaps they deserve to be in an era of low inflation, rock-bottom interest rates, cheap energy and growing corporate profits. (See: “Is This the End of the Eight-Year Bull Market?”)

Now they have a new excuse: Insider buying just hit the lowest level in 29 years.

This sounds kind of scary at first blush.

After all, who knows better than top executives and directors what lies ahead for their firms? And if they aren’t buying, why should you?

There’s a flaw in this argument. And it’s a big one.

It’s true that corporate insiders know more than anyone else about their companies’ near-term business prospects. After all, they have access to all sorts of material, nonpublic information that gives them an unfair advantage when they go in the market to trade.

That’s why the Securities and Exchange Commission requires them to file a Form 4 – detailing how many shares they bought, at what price and on what date – anytime they make a transaction in their own companies’ stock.

This levels the playing field since the public learns what the insiders are doing almost immediately. And while we can’t know exactly why they’re buying, at least we know that they are.

That’s why the smart money on Wall Street watches insider transactions the way barn owls watch mice.

But let’s be real. Insider don’t know – couldn’t possibly know – what the market itself is going to do. After all, they’re experts on their own companies’ prospects… not clairvoyants.

The S&P 500 doesn’t always rally when there is heavy insider buying. Nor does it falter when insider buying slows down.

But take a look at the shares of the companies that experience insider buying. History – plus dozens of academic studies – show that these stocks substantially outperform the broad market.

It’s not important whether there is widespread insider buying. What matters is which insiders are buying how many shares at which companies.

There have been plenty of telling purchases even during this period of relatively light buying.

Last week, for instance, billionaire Patrick Soon-Shiong purchased more than 2.9 million shares of Tronc Inc. (Nasdaq: TRNC), the owner of the Chicago Tribune and Los Angeles Times, for $14.87 a share.

That’s an investment of $43.9 million, a strong indication that he thinks the stock is undervalued. Especially when you combine this news with the report that he is trying to raise his stake in the company to 30% – and, so far at least, the board won’t let him.

Or take engineer and inventor Elon Musk, the CEO of Tesla (Nasdaq: TSLA), a company that specializes in electric cars.

Some people think Tesla is overvalued. But Musk – who sees everything from daily sales orders to new models in development – isn’t one of them. This month, he purchased 95,420 shares at $262 apiece, an investment of $25 million.

That doesn’t make the stock a buy, necessarily. But certainly it’s worth closer investigation. (See: “Why You Should Have Tesla in Your Portfolio.”)

There have been dozens of other recent buys in banks, healthcare companies, technology leaders, biotech firms and energy producers.

My advice? Forget about how many insiders are buying today compared to years past.

The important thing – again – is who is buying how many shares and at which companies.

Knowing those facts can’t help but give you an edge.

In fact… my team and I are writing up the final results of a comprehensive three-month investigation into insider trading.

Keep a close eye on your inbox next week for a message from me about it.

I believe everyone will soon be talking about it.

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Shift Daily News

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