Like playing the piano or hitting a curve ball, I never learned to create stock-trading programs. But I have no regrets about it. I love to sit down and play with market-based ideas and concepts. While I have friends who can crunch 20 years of data in R in a flash, I must run it all though a good old Excel spreadsheet. Using my laborious method, I recently tested some ideas related to insider buying -- which Jon Moreland's databases at InsiderInsights made easy, even for me.
I had been playing around for a few weeks with a simple idea, which is this: Because the CEO and CFO of a corporation know more about its condition and plans than anyone else, when they buy a large amount of company stock, it is likely to be a significant event.
Testing verifies that I am on the right path. From 2008 to the end of 2011, riding the coattails of the two top executives would have resulted in 75% winning stock picks, with an average gain of more than 80%. So far in 2012, the database test found 36 winners out of 48 companies, with an average gain of 74%.
For this test, I counted only direct, open-the-checkbook, buy-in-the-open-market purchases worth at least $50,000. Options exercise, stock grants and other forms of compensation were not included. For the purposes of the study, the shares were assumed to be held until the end of the calendar year. That capped the potential gains, but saved me two hours of wrestling with a spreadsheet. It appears that a longer holding period would have delivered higher returns, confirming that insiders tend to be long-term investors in their company shares.
When you follow the data, many weeks, even months, can elapse between buy signals. In the past couple of weeks, however, we have seen some strong buying activity that might represent profitable trading and investment opportunities.
The largest purchase was, of course, the monster $17 million investment by JPMorgan Chase (JPM) CEO Jamie Dimon. Although the purchase was largely funded by the sale of preferred stock, Mr. Dimon opened the checkbook and added about $3.6 million to buy shares. The last time he bought shares was in January 2009, after which the price fell sharply. But it subsequently recovered, and Mr. Dimon now has a gain of more than 50% on those shares.
Insiders have also been buying one my favorite long-term banking names: First Niagara Financial (FNFG). In the past week, CEO John Koelmel purchased 25,000 shares and CFO Gregory Norwood added 10,000 shares to his stake. Two directors were also decent-size buyers of FNFG recently. The stock currently trades at a small premium to tangible book value. But with an equity-to-assets ratio of 13 and nonperforming assets below 1% of total assets, the bank is a solid investment. It's up sharply today, but I would be a buyer in a market decline, with the intention of holding for many years.
Boston Scientific (BSX) has struggled over the past few years. The market for heart stents, which supplies 45% of the company's revenues, is very competitive and crowded. The company has several new products for the cardiac rhythm management market, although sales have yet to take off in a meaningful way. CEO William Kucheman appears to think that the new products and increased exposure to emerging markets will lead the company fortunes and stock price higher, as he recently bought an additional 10,000 shares of stock. (Last week, President Michael Mahoney also purchased 22,000 shares of BSX in the open market.) I like this stock as a long-shot stock pick for aggressive-minded, patient investors.
It makes sense to track CEO and CFO open-market stock purchases as a gauge of company fortunes. Following the top executives is not a foolproof method of trading, but it does tip the odds in your favor. Of course, you should always do your homework.