There are very few edges left in the stock market. The tremendous amount of money, talent, and strategies combined to create a nearly efficient market that is exceedingly difficult to beat consistently. Add in structural changes like tightening spreads, decimalization, and high-frequency trading machines, and the stock market becomes a formidable foe for even the most sophisticated investor.
The good news is that there are several edges still available for the retail investor. Yes, the market can still be beat!
Choosing and holding the right stocks for the long term is the primary way to beat the market. All the short-term gaming and manipulation do not affect long-term stock market investors.
The trick is choosing the right stocks. Skill in stock picking remains a potent edge in the very efficient stock market of the 21st century.
One of my favorite ways to pick stocks for my account is by following the insiders. Insiders are anyone who has access to non-public, stock-moving information about a company. They can be corporate directors, officers, or even lawyers and accountants who are working with the company.
It’s just not my experience that supports an edge in following insider buys. Several academic studies support the market-beating edge in following insider stock buys.
Interestingly, the same cannot be said for insider stock sales. While this may seem strange, it makes perfect sense.
Insiders can sell stocks for any reason. Whenever someone needs cash, they can liquidate stocks to pay for it. Ideas like a home purchase, college, or even to invest in another company are just a few very legitimate reasons for an insider selling their shares. In other words, insider selling does not mean that the company is in trouble.
On the other hand, people only buy stocks for one reason. The reason is that they think the stock will move higher. When the buyers are insiders with information about the company, it is a strong tell that something will soon happen to push the shares higher.
Fortunately, insiders and investors who control more than 5% of the company’s stock are required to report their holdings. By monitoring the filings of insiders, their activity can be analyzed and wise investing decisions made.
Don’t worry! There is no longer any need to dig through the 13D and other insider filings on your own. Several online services exist to assist retail investors to filter insider activity. My favorite insider focused data site is www.insidermonkey.com. Insider Monkey slices and dices insider trading data into an informative and easy to use format.
Before using this data to trade, there are three things you need to know about insiders. First, insiders are usually contrarian investors. This means that insiders are generally buying when the share price is low or going down. The reason for this is that insiders are acting on information not available to the public, therefore actively buying before everyone else.
However, it is critical to keep in mind, that this is not always the case. Share price can be going up, down or flat when insiders are buying.
Second, insiders are not always correct. The stock can be influenced by other factors, muting the expected move from insider selling or buying. The economy, the overall market, news, and a host of additional price affecting data often moves stocks despite insider buying.
Finally, following the legal insiders is not illegal. Investors hear the term insider buying and automatically think it is a criminal transaction. The fact is, most insider trading is done legally and within the bounds of the SEC regulations. Only the illegal type of insider trading makes the news, leading to the common misconception. Here are five stocks with heavy insider buying:
1. Myovant Sciences (NYSE: MYOV)
Insider pharmaceutical giant Takeda is accumulating shares in Myovant. Takeda is a significant shareholder in Myovant and recently purchased over seven million shares in the $18.00 per share range.
Shares are higher by nearly 90% over the last 52 weeks, and Takeda and a host of other insiders are clearly expecting additional upside.
2. Century Link (NYSE: CTL)
This communications company fits the profile of a stock being bought by insiders but lacking visible outperformance. Shares are lower by close to 30% over the last 52 weeks.
Temasek Holdings is loading up on shares now. The firm has purchased over four million shares within the last 30 days and is listed as a significant shareholder of Century Link.
3. Ecolab (NYSE: ECL)
This water, hygiene, and energy services company is being heavily bought by Bill Gates. Mr. Gates has purchased around a million shares across several transactions in the last 30 days. His purchase price was between $134.00 and $137.00 per share.
The stock is higher by about 11% over the last year.
4. Homology Medicines (Nasdaq: FIXX)
Company director James Flynn just snapped up over a million shares within the last thirty days. The company specializes in gene therapy for rare conditions and is a recent IPO. There is not enough price performance data to list.
5. Trinity Industries (NYSE: TRN)
This industrial company is trading lower by over 15% in 2018. A substantial shareholder named Valueact Holdings has purchased over one million shares in the $32.00 range.
Risks To Consider: Following the insiders is far from foolproof. Over time, an edge has been proven, but each investment is not guaranteed. Even insiders can and do lose money. Remember, there are many market-moving factors that even the insiders cannot control!
Action To Take: Start to monitor insider activity and consider using it as another decision-making tool.
— The Option Specialist