What Can We Learn From Insider Action? A Lot

There are a number of ideas taken from various sources as of mid-August this year. Somewhat surprisingly, the Thomson Reuters Insider Sell/Buy ratio is now fairly bullish. Insiders always sell more shares of their own company's stock than they buy. That's because they typically receive incentive shares and/or stock options as part of their compensation packages. As such, the sell/buy indicator reads positive when total insider sales are less than 12 compared with each share purchased on the open market. As of Aug. 13, the ratio stood at just 8. Compare that with a reading of almost 140 back in mid-April of this year or 76 in February. Insider trading is a real money indicator, not a psychological one. As such, bullish or bearish readings are what you see is what you get rather than contrary. Why was I surprised to see insiders so enthusiastic? Insiders like to buy cheap. Yet the broad indexes are all at new all-time highs. They ranged from up about 15% year to date (Nasdaq Comp.) to almost 19% on the S&P 500. Trailing 52-week returns went from 27.31% on the Dow Jones to 34.45% for the S&P 500. The top five insider sales (by number of trades year-to-date) all made sense to me. Peleton trades at an insanely high valuation. Who could blame management for ringing the register and cashing out now? Ditto for Palantir at nearly $25, when they've never come close to turning a profit. Carvana is astounding expensive at almost $362, while never posting a profitable year. Snowflake is not yet covered by Value Line. Its trailing 12-month loss was $3.23 per share yet it sold on Aug. 13 for over $291. Salesforce was the only one of the top-five insider sales that has turned solidly profitable. That said, it was fetching almost 70-times this year's estimated EPS last week. As a group, those five companies saw a combined $2.1 billion in insider sales so far in 2021. Now let's look at the top five insider buys (by number of insider trades) year-to-date. Most readers won't know any of these except, perhaps, Joann (JOAN), a previously publicly traded fabric retailer which IPOed again last March. Other than Design Therapeutics all are quite profitable. Golub Capital is a private capital investment outfit with lumpy earnings due to the nature of their business. With 32 separate insider buys things must be going well for them. GBDC closed last week just a bit higher than the average price paid by insiders this year. Recently public again, JOANN Inc. sports a similarly cheap valuation along with a 2.71% dividend yield. JOAN is already 25.5% above the average buy price of insiders. Design Therapeutics is losing money and pays no dividends. Insiders might have some ideas about future prospects for their drugs/gene therapies in development. So far, though, the Aug. 13, quote is well below the average price paid by insiders year-to-date. Five Star Bancorp looks just fine on valuation and yield even after rising by 24.2% from the average cost paid by its insiders. Mid Penn Bancorp is another fine region bank with a very low multiple and an almost 3% current yield. Company officers look smart so far as the shares are now 6.96% above their average purchase level. It's not hard to guess why the four stocks that are up so far did well, while the one laggard has declined. Low valuation companies with solid income streams can be quite attractive. One final note. Barron's list of the largest (by assets) mutual funds in America illustrated clearly why owning bonds or bond funds makes no sense in today's world. The five funds loaded with fixed income (boxed in red) severely underperformed equity funds year-to-date. Only Vanguard's Mixed-Asset Target 2030 fund with a dollop of equities made a reasonable, but unexciting, return this year. Three posted negative total returns. The other made just 0.3%. Just three of the 19 pure equity funds, Dodge & Cox Stock , Fidelity SA US Total Stock Market and Fidelity's Strategic Advantage Large-Cap Fund outperformed the S&P 500 year-to-date. Enormous, and growing money printing by the Fed means our high inflation world is unlikely to calm down anytime soon, if ever. Protecting your wealth against the ravages of inflation means owning assets which can adjust for higher inflation and perhaps even profit from it. Real estate, private business ownership and precious metals might also work over the long haul but they all sport poor liquidity, major carrying costs and high transaction fees. Stocks remain the best way to accomplish the goal of overcoming rising prices with liquidity and relative safety.

What Can We Learn From Insider Action? A Lot

Let's look at this 'real money' indicator -- and the top 5 insider purchases by company -- amid the August action.

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