Insider Trades With A Catalyst | The Acquirer's Multiple®

During his recent interview with Tobias, Scott Jackson, CIO at Ravenwood Capital Management discussed Insider Trades With A Catalyst. Here’s an excerpt from the interview:

Scott: Yeah, we’ve evolved over time from philosophy, being the lowest price to book, debt to cap manager. I’ve always had a huge focus on insider transactions in the open market and insider ownership. And that’s been driven by– there’s a professor at the University of Michigan. I don’t want to butcher his name, but I think it’s Nejat Seyhun. He wrote a book called– it’s like, Intelligence from Insider Trading, or something like that.

Basically, I had gone through– it’s the same type of format as Jim O’Shaughnessy’s What Works on Wall Street with the core focus on inside transactions in the open market. The conclusion from that book was that, they tested P/E and then price to sales, and they focused on– they said if you combine price to book with the– insider buys over 10,000 shares, which is arbitrary because you have different dollar amounts. And then, you go down the cap spectrum, into the micro-cap spectrum, you end up with 40% annual returns. That’s kind of been the cornerstone.

I think I sent you a copy of the portfolio. If you look at the portfolio, all of our names, we’ve got just a ton of insider buying, no selling and our stuff’s pretty cheap. We’ve evolved away from the price to book side and it’s more your love for enterprise value to EBITDA.

Tobias: Yeah, I recognized a lot of the names as I was going through. They’re old friends of mine, a lot of them.

Scott: Yeah. So, we do that, but then we also combine it with– we really try to drill down on the catalysts. And so, we look at a lot of like alt data.

Tobias: What’s alt data?

Scott: Well, alternative data, like Google Trends data, website traffic data. So, we’ll look at what’s going on at the top level. We’ll look at overall web traffic, where the hotspots are.

For example, the way things have evolved in the pandemic, we didn’t scrap the portfolio, but we sort of made small adjustments. And then, came to the conclusion that there were so many landmines out there, so much risk out there that we think that we couldn’t see, so we didn’t touch anything that didn’t have insider buying after 3/15, when we were in a full-blown pandemic. And then, that led us to– typically we use screens for idea generation, but we backed into it and just used insider buys, and then looked at valuation and then if valuation was good, then we moved on to the catalyst. And typically, you compare the catalyst stuff, you could figure out why the insiders were buying. So, a lot of it was e-commerce driven, esports video game type stuff, that was cheap. And we did really well.

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