Stock insiders are predicted to be heavily invested
Insider buying, the act of company executives and directors purchasing shares in their own company, is often seen as a positive signal on the capital market. This trend was evident in several companies, including Caesars Entertainment, Insulet, Keurig Dr Pepper, and others, where insider buying constituted a small percentage of their market capitalization.
Research consistently demonstrates that stocks with high levels of insider purchases tend to outperform the broader market, particularly in the short term. This effect is especially pronounced in situations known as "cluster buying," where several insiders buy shares in close proximity to one another, often following a period of poor stock performance just before a potential turnaround.
Empirical findings suggest that insider purchases have a significant positive relationship with future firm performance. This predictive power is especially strong when insiders make opportunistic (rather than preplanned) purchases, indicating genuine confidence in a turnaround. Historically, insider buying, notably cluster buying, has been associated with above-market returns, particularly in the year following the purchases, and even more so during market selloffs.
Companies undergoing operational or financial challenges, such as Air Products and Chemicals and VF Corporation, often see insider buying as a sign of management's belief in a successful turnaround before it becomes evident to the broader market. The positive impact of insider buying on future returns is most evident over a one-year horizon, especially for underpriced stocks.
However, it's important to note that not every insider buy leads to immediate gains, and some turnarounds fail. The predictive power of insider buying is stronger for overvalued and underpriced stocks, particularly when insiders act on non-public information about company prospects.
Investors should consider the broader business context and not rely solely on insider activity as a predictor of success. Long-term investors might want to avoid these stocks based on the average performance statistics, as the impact of high insider buying is often short-lived, especially with turnaround plays. Investing in these stocks may only be suitable for short-term and risk-tolerant investors.
| Factor | High Insider Buying (Cluster) | General Market | Distressed/Turnaround Stocks | |-----------------------------|-------------------------------|---------------|-----------------------------| | Avg. 1-Year Return | Outperforms | Benchmark | Variable, but higher with insider buying[1][3] | | Signal Strength | Strong (opportunistic buys) | N/A | Strongest in downturns[1][3] | | Turnaround Success Rate | Higher with cluster buying | N/A | Improved with insider support[3] |
In conclusion, stocks with high levels of insider buying, especially in turnaround situations, have historically exhibited stronger long-term performance than the broader market, with cluster buying being a particularly bullish signal. However, investors should consider the broader business context and not rely solely on insider activity as a predictor of success. Management buying shares after a significant sell-off can aim to rebuild trust in the capital market.
- Investors who are interested in capitalizing on potential turnarounds may find it advantageous to closely monitor companies with high levels of insider buying, particularly instances of 'cluster buying,' as these stocks have demonstrated a historical tendency to outperform the market, especially in the year following the purchases.
- While insider buying, particularly cluster buying, can predict strong future performance for distressed or turnaround stocks, long-term investors should exercise caution and consider the broader business context, as the impact of high insider buying is often short-lived, especially with turnaround plays. Short-term and risk-tolerant investors, on the other hand, might find such stocks as suitable investment opportunities.
