Insider Trading: Look Who’s Buying on Wall Street

Individual investors have learned this week that trying to predict the direction of the stock market is a fool's game. But there is one group of major league investors who may actually deserve our attention: CEOs and other corporate insiders.

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Illustration by Alexander Ho for TIME

As individual investors have learned this week, trying to predict the direction of the stock market is a fool’s game. The supposed “indicators” that analysts use to pepper their prognostications are often scarcely more accurate than tea leaves, and the idea that Wall Street pros know which way the market will trend in the short-term is a myth right up there with the Easter Bunny, the Tooth Fairy, and the ability of leprechauns to locate gold.

But there is one group of major league investors who like the way the market looks and have been pouring millions into stocks. Who are these equity optimists? CEOs and other corporate insiders, and they’re buying up stocks in their own companies by the bushel.

The data comes from the Wall Street analytical firm Insider Trade Reports, which specializes in tracking insider trading volume. ITR has noticed a big uptick in corporate insider trading this week, especially on the “buy side” of the market. “Insider buying continued to remain very strong for a third day in a row with insiders picking up more than $65 million worth of stock in a single day,” the firm said in a statement Tuesday.

(MORE: Is the Economy Worse Off Than in 2008?)

ITR evangelizes the notion that even regular investors can make big money following the trading patterns of CEO’s and other big executives. The company says on its site:

Over four decades of academic research has shown that by following in the footsteps of company insiders and buying the stocks that they are buying, you can outperform the market by 6% to 10.2% per year.

I haven’t read the literature, so I’m not going to fully endorse that statement or suggest that anyone ought to adopt the investing strategy it implies. (It’s not even clear to me how an individual investor might “follow in the footsteps of company insiders.”)

But in the midst of an awful lot of stock market gloom and doom, it does seem worth noting that the people who are most intimately familiar with the performance and prospects of certain companies are enthusiastically bullish.

(MORE: Can China Help Prevent a U.S. Tailspin?)

So who is buying what stocks right now? The financial web site MarketFolly.com has a good list here.  But ITR also gives some more detailed examples:

August 10, 2011 — Federal-Mogul Corp. (Stock Quote: FDML): $17.78 Director Carl C. Icahn acquired 139,899 shares of this auto parts manufacturer, paying $15.24 per share for a total amount of $2.1 million. These shares were purchased indirectly through IEH FM Holdings LLC.

ITR points out that Icahn owns a majority stake in the company and had been planning to sell when the stock stood at $24 per share. But with the market decline and the stock trading at below “book value,” Icahn thought twice and became a big buyer. (Book value is a big deal to value investors because it gives you a sense of what the company would sell for in a fire sale.)

Here’s another:

August 9, 2011 –  ZIOPHARM Oncology, Inc. (Stock Quote: ZIOP): $5.46 Director Randal J. Kirk acquired 846,522 shares of this biotech company, paying $4.78 per share for a total amount of $4.04 million.

And another:

August 3, 2011 – Life Technologies Corporation (Stock Quote: LIFE): $43.57 Director Ronald A. Matricaria acquired 10,000 shares of this biotech company, paying $43.73 per share for a total amount of $437,348. Mr. Matricaria increased his stake by 16.67% to 70,000 shares with this purchase.

Again, I’m not arguing that non-professional investors should blindly follow CEOs into the market. Even sophisticated professional investors have a tough time making sense of insider trading patterns. Among the complicating factors that individual investors often overlook are:

  • Purchase Size: 1,000 shares may seem like a lot to a 401(k) investor, but it’s not to a CEO. It’s the larger purchases that warrant attention.
  • Diversification: Many CEOs, and especially company founders, sell large quantities of stock programatically over time as a way to diversify their wealth,thus such sales don’t reflect their take on the company’s prospects.
  • Company size: Armies of analysts watch every move that large companies make, so you’re less likely to learn something from CEO behavior that the market hasn’t already recognized. You have a better shot at getting an early jump on insider activity at smaller firms — but such companies tend to be riskier bets.

Many observers have noted the recent divergence between the fine health of many large corporations and the poor health of the global economy. It’s nice to know many corporate execs seem confident that their companies will continue to thrive in this less-than-ideal environment.

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