Corporate Insiders are Bullish and Buying Stock

The volatility in the stock market this week is unprecedented, with the Dow Jones Industrial Average (DJI: ^DJI) whipsawing at least 400 points up or down in each of the first four trading sessions for the first time in its 115-year history (i.e., since 1897). Of course, the Dow didn’t reach a price level of 400 until 1955, so a 400-point move wasn’t technically possible for half of its existence.

More useful than point moves is to look at percentage moves and the number of times that the Dow has moved at least 4% for four consecutive days. The answer is only six times: October 1929, September 1932, April 1933, October 1987, November 2008, and this week in August. Subsequent one-year stock performance was positive in four of the past five instances, but with several jaw-dropping downdrafts along the way.

Given this tremendous market uncertainty caused by the U.S. debt downgrade and double-dip recession worries, you’d expect corporate management – also known as insiders – to be hoarding their personal cash and be satisfied collecting their paychecks until things settle down and the economic future comes into better focus.

Corporate Insiders are Buying Stock Big Time

Insiders aren’t waiting.

In fact, corporate insiders are digging deeper into their pockets to buy more stock in the companies they work for than at any time since March 2009 — when the S&P 500 hit a 12-year low. According to some, the pace is faster now than it has been for an even longer period — since May 2008. Insiders know their companies better than anybody else, so I think this data is important for the average investor to consider before they follow the crowd and jettison their stock holdings in panic. 

Trends in insider buying have been almost as volatile as the stock market has been. Just a month ago in July – prior to the August market crash – corporate insiders were dumping stock at the fastest rate in over 30 years. Insider selling in mid-July proved to be brilliant market timing.

Academic Studies Prove that Insiders are Good at Timing Stock Purchases

Will insider buying during the first week of August prove to be just as brilliant and end up correctly forecasting a market upturn? Based on a 2011 academic study, the answer is yes:

With the public announcement of insider purchases or sales, investors can respond almost immediately in the next round of trading. The expectation is that these investors will consider the purchases a signal of future increase in firm’s value and proceed to purchase, which will increase the stock value. Evidence here supports the notion the insiders do in fact “buy low.”

Similarly, a 1998 book by University of Michigan finance professor Nejat Seyhun found that between 1975 and 1995, stocks bought by insiders outperformed the market by 7.5 percentage points over the following 12 months whereas companies with insider selling underperformed the market by 6.1 percentage points. 

Recent insider buying is only one type of insider data that is important. Another important type of insider data is the percentage of a company’s shares that insiders own — regardless of when the insider ownership was initiated. A 1990 study (page 601) found that a company’s market valuation (i.e., ratio of market value to asset replacement cost) rises with increasing insider ownership and hits its highest level when insider ownership hits 37.6%. Insider ownership above 45%-50% reduces the company’s value (page 59) because when insiders have effective veto power they can unilaterally make decisions that help themselves at the expense of minority shareholders.

Bottom line:
if you want to learn how to pick great stocks, look for companies heavily owned by insiders. A corporate manager that has her personal financial interest aligned with shareholders is more likely to maximize shareholder value than is a manager who simply collects a salary.

CEOs are Buying

Also of interest is the fact that the insider buying going on right now is heavily weighted towards CEOs rather than just middle managers. A 1999 Wharton study concluded that “the purchases of top executives are found to be more informative than those of other insiders.” Consequently, the recent insider purchases appear to have more potent predictive power of bullishness than normal.

Below is a list of five of the largest recent insider buys by CEOs:



Average Price Per Share

Dollar Amount

Cintas (NasdaqGS: CTAS)

CEO Scott Farmer


$17.8 million

Six Flags Entertainment (NYSE: SIX)

CEO James Reid-Anderson


$2.5 million

Morgan Stanley (NYSE: MS)

CEO James Gorman


$2.1 million

Helix Energy Solutions (NYSE: HLX)

CEO Owen Kratz



General Growth Properties (NYSE: GGP)

CEO Mathrani Sandeep



Source: Bloomberg


With insiders frantically buying stock, don’t you think it might be wise to buy some too, or at least hold on to the stock you already own?


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