The First Cut: Insider Activity
by John Bajkowski
Many investors monitor the buying and selling activities of corporate insiders because they are privy to information regarding new products, competition, and operating environments and therefore better positioned to understand the future prospects a company.
The term insider refers to a wide-ranging group of individuals and large shareholders. While it is illegal to trade stock based on material, non-public information, trading by insiders using non-privileged information is legal, albeit highly regulated. SEC-required reports outline insider transaction histories and ownership interest; it is those reports that investors monitor.
While insiders sell company stock for a number of reasons, insiders may not put up their own money unless they believe the investment will make a profit. It is important to note, however, that open market purchases of stock by an insider carry more weight than shares acquired through employee stock options or share grant programs.
This issues First Cut presents domestic, exchange-listed companies in which the number of insider buy transactions exceeded the number of sell transactions over the last six months. The net number of shares purchased (shares purchased minus shares sold) was compared to the number of outstanding shares, and the top 30 firms ranked by net insider buys as a percent of shares outstanding made the First Cut.
The listing also presents historical and expected earnings per share, revealing that most of these companies are currently losing money, although their consensus estimate may hold hope for improvement. The 26-week price change provides a feel for price strength, while the market capitalization (stock price time shares outstanding) indicates that most of these firms are small to mid-sized companies. While it is not wise to base your buy and sell decisions solely on insider data, it might be foolish to ignore.