The Power of Insider Buys: Spotting Strong Signals from Key Executives

During their recent episode, Taylor, Carlisle, and Asif Suria discussed The Power of Insider Buys: Spotting Strong Signals from Key Executives, here’s an excerpt from the episode:

Tobias: Talk to us a little bit about insider buys, insider sells. What’s the signal there is a buy from one person? Is that enough or are you looking for a cluster of buyers, or how does that work?

Asif: I don’t mind looking at something where its only one person buying, as long as it’s a very interesting person doing that. By interesting, I mean somebody who might be on the board of directors for 10 years or 15 years, hasn’t bought stock in the last decade, and then suddenly comes in and buys a large amount and has an investing background. So, that’s the kind of person I’m really looking for. So, if it’s just that one person who comes in, management is selling, it doesn’t matter. I think that’s a very strong signal for me.

Peter Lynch used to say that, “Insiders sell for all kinds of reasons. They want to buy a new vacation home. They want to send a kid to college. But they only buy for one reason, which is they think the stock is going up.” That might have been true when Peter Lynch was running Magellan, a really long time ago. But as you see with theory of reflexivity, the markets observing what’s happening with these insider transactions, and the management team understands that they are.

So, sometimes they just buy the stock to signal the market. You might see a cluster purchase where a bunch of insiders together might buy it to even try to send a stronger signal to the market. So, the insider buy or even a cluster insider buy is not the do all be all. It really is a mechanism for idea generation.

So, for example, this morning, we reported on 22 insider transactions, insider purchases. As were going through that last night, I found five out of that I found really interesting, and I added it to a watchlist to do more research on. So, I see it as an idea generation strategy. And then there are specific things like an independent director that I was talking about that buys that hasn’t been buying before. That would be a strong signal that I would look for. Some of that is happening right now.

Jay Hoag, who is on the Board of Directors of Zillow, bought a few months ago. As you probably noticed, a few days ago, they announced that the founder, Rich Barton, is stepping down and they have a new CEO. When Jay Hoag bought a few months ago, I couldn’t quite figure out why he was buying it, considering the lawsuit that the National Association of Realtors just settled. That didn’t seem like an appropriate time to be buying a stock like Zillow. But now I understand what might have been its motivation.

So, I see this every now and then where they buy, and it doesn’t make sense and eventually, you figure out why they were buying. So, the kind of insider is what I focus on, as well as the idea generation aspect of following it.

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