It’s not a silver bullet or a guarantee of gains 100% of the time, but insider buying can be instructive for investors evaluating stock with upside potential.
Think of insider buying this way. While a company’s high-ranking executives and board members may sell equity in that firm for any number of reasons, not all of which are bad, there’s only one reason why they buy stock in the company: because they believe the shares are going to appreciate.
“CEOs have an obvious monetary incentive and if they think that the stock price of their firm is ‘too’ low, then they can buy,” said Thomas Gilbert, associate professor of finance at University of Washington’s Foster School of Business, in an email to InvestorPlace. “As long as this is not done based on private information and publicly run through a regular schedule and disclosed.”
So at the very least, investors monitoring insider buying trends and opting to follow suit may not always be on the right side of a trade. But they are enhancing their odds of success because company insiders have intimate knowledge of what’s happening at the firm and in their respective industry.
Here are a few names to consider where there has recently been some notable insider buying:
- Red Rock Resorts (NASDAQ:RRR)
- Kinder Morgan (NYSE:KMI)
- Golub Capital BDC Inc (NASDAQ:GBDC)
- DraftKings (NASDAQ:DKNG)
- Bloom Energy (NYSE:BE)
Red Rock Resorts (RRR)
Just this month, brothers Frank and Lorenzo Fertitta gobbled up approximately $17 million worth of this casino company’s equity. Frank is the chief executive officer of Red Rock, while Lorenzo is a vice president. The pair control two of five board seats.
The insider buying by the Fertitta buyers can be construed as encouraging for multiple reasons. First, the bulk of Red Rock’s casinos are in Southern Nevada, which is still grappling with adverse effects of the novel coronavirus. In fact, the company is keeping four of its venues in the region, including the Palms, closed until next year, stoking speculation about what the ultimate fate of that quartet is.
Another encouraging sign is that the brothers are buying into strength with RRR stock higher by about 53% over the past month. That could be a sign that they think there’s more to come, even though the stock is up more than sixfold from its March lows.
Notable is the fact that unlike so many gaming companies, Red Rock kept its dividend in tact during the Covid-19 swoon. The stock yields 2.38%, which is decent these days, and with the Fertittas gobbling up shares, that could be a sign the payout is safe.
Kinder Morgan (KMI)
Speaking of dividends that appear to be surprisingly safe, Kinder Morgan boosted its payout 5% in April to $1.05 a share and wants to drive it to $1.25 per share. That’s some positive commentary considering the energy sector is home to an array of negative dividend action this year.
KMI stock yields 7.44% as of Aug. 21. Founder and Chairman Richard Kinder is a devoted buyer, scooping up $5.25 million worth of the name this month.
Kannan Ramaswamy, William D. Hacker Chair Professor of Management in Global Business at the Thunderbird School of Global Management, notes that insider buying in blocks of $1 million or more at integrated oil majors is “fairly routine,” but that big insider buyers at an independent energy company, of which Kinder Morgan is one, can be more instructive for investors.
Golub Capital BDC (GBDC)
As its name implies, Golub Capital BDC is a business development company (BDC), making it a high-yield idea. GBDC stock yields 9.10% as of Aug. 21. Chairman Lawrence Golub and CEO David Golub have bought approximately $9 million worth of the stock this month. Additionally, the small-cap BDC has supporters in the hedge fund community.
Although the Golubs’ support of their community should be expected, it’s notable this year because with the economy ailing from the impact of Covid-19, these are difficult times for BDCs. BDCs make loans to small and mid-market firms that are generally lowly rated and therefore have difficulty accessing capital from traditional lenders.
That’s risky in any environment, but more so at a time when credit markets are concerned about rising defaults. Adding to the strain on BDCs is that many of their borrowers are issuing new equity to bolster cash positions, diluting equity the lending BDC received as part of loan terms.
GBDC stock is higher by 6.74% over the past month, indicating it’s been responsive to the insider buying, but it needs to gain another roughly 50% to reclaim its 52-week high.
About two months after its April initial public offering (IPO), DraftKings was hit by a deluge of insider selling to the tune of almost $600 million as founders and early investors locked in gains on their stakes. The sheer mass of that insider selling weighed on the stock in June, playing a role in sending it lower for the month.
However, one of the company’s most recent filings with Securities and Exchange Commission (SEC) indicates co-founders Jason Robins, Paul Liberman, and Matthew Kalish recently bought shares in the company they started.
Giving the timing of that insider buying, it’s encouraging on multiple fronts. First, it’s an indication the DraftKings higher ups expect NFL season will proceed as planned. Look at it like this. If you worked for a sports betting company and you knew the NFL wasn’t happening this year, would you buy the stock before that news became public? Probably not.
Second, insider buying at DraftKings is a sign management is convinced more states will legalize iGaming, sports betting, or both and that some of that liberalization will arrive in the coming months or next year.
Bloom Energy (BE)
Former General Electric (NYSE:GE) CEO Jeff Immelt earlier this month bought $1.04 million worth of Bloom Energy equity. Immelt is a director at the company. This could be an indication of good timing on his part because as demand for renewable energy increases, so does storage demand, and that’s Bloom’s area of expertise.
Bloom makes power generation products that can convert natural gas, biogas, or hydrogen into power without the pollutive effects associated with traditional energy sources. However, Bloom has an expansive business model touching power generation, installations, product, and service, which should enable the company to carve out more market share and revenue as demand for electric grid refurbishment increases.
As for Immelt’s purchase of BE stock, it was impactful, sending the shares higher by 19.30% on Aug. 18 – the day his equity buy was revealed. Enthusiasm for this buy is likely tied to the fact Immelt bought Bloom equity on the open market, not via options granted to him for his service as a board member. His open market buy is a sign of confidence in the company.
Todd Shriber has been an InvestorPlace contributor since 2014. He owns shares of DraftKings.