If You Can’t Beat Insiders… Why Not Join Them?
It was a terrible week for fair-market believers. Last Tuesday, an investigation by the Wall Street Journal revealed more than 130 U.S. federal judges broke the law after hearing 685 court cases in which they had a financial stake. And the following day, researchers at Bloomberg published results that found widespread insider trading by corporate executives. One such insider, CEO Snehal Patel of Greenwich LifeSciences (NASDAQ:GLSI), earned 488% after making four trades that preceded announcements of promising clinical trial results.
In other words, conspiracy-minded Redditors are right. Trading among insiders is far more prevalent than most people believe.
So, what to do?
Righteous-minded investors might consider writing their Congressional representatives. After all, legislative reform could quickly ban such practices.
More cynical investors, however, will realize that Congress has done little since 1934 to fundamentally change insider trading rules. InvestorPlace’s Joel Baglole has already written an article examining some of the most popular stocks among U.S. senators.
If you can’t beat them, why not join the thousands of executives trading shares? It isn’t a perfect metric by any means. But if you see a mining executive running with a gold-digging shovel, perhaps it’s best to drop what we’re doing and follow right along.
The Insider Trades to Watch
Though the Securities and Exchange Commission bans trading on “material, non-public information”, corporate executives have long used enforcement loopholes to trade anyway (provided they report trades and avoid blackout periods).
According to stock aggregator Tipranks, C-suite investors have achieved an annualized 26% return on their trades since 2010. By screening for the top-ranked insiders, the figure rises to 39% — almost triple the market return.
Now, I’m NOT saying that insider trading is morally justifiable. Far from it: these trades showcase the inequities baked into the U.S. financial system. Some insider trades can earn more in seconds than entire families do in a lifetime.
On the other hand, what if we can’t change the system? Well then you still have me… an investor who’s always happy to point out the absurdities in life — and see what Moonshot lemonade we can make from the lemons we’re given.
Osisko Mining (OBNNF)
I’m often hesitant to buy shares of commodity-based firms when insiders do. Many mining, metals and agriculture executives are equally in the dark when it comes to predicting long-run commodity prices.
Osisko Mining (OTCMKTS:OBNNF) however, deserves an exception. The Canadian-based mineral exploration company has more going for it than gold and zinc prices. Just look at the insider buying:
- CEO and Chairman John Burzynski bought CAD 36,600
- President Mathieu Savard bought CAD 15,000
- COO Donald Njegovan bought CAD 18,800
- CFO Blair Zaritsky bought $13,500 (USD)
That’s because exploration companies are a lot like biotech firms — their shares tend to go bananas when they make a new discovery.
And I suspect that right now, Osisko executives know something that we don’t (Hint: it likely involves a new mining site).
Some might wonder: isn’t discovering a new drug or gold mine a material event that bans executives from trading stock? In a sense, yes. You won’t find executives receiving finalized survey results and then immediately calling their broker.
Often, however, mining professionals don’t need finalized data to make decisions. When you know what rich veins look like, initial surveys are often enough to say “hey, maybe there’s gold in them hills.”
Osisko shares are priced at less than $2, barely above book value. A new discovery will easily send shares up 200% or more.
Biomea Fusion (BMEA)
Occasionally, insider buying represents a slower-burning catalyst. And Biomea Fusion (NASDAQ:BMEA) is a stock that fits that bill.
This promising cancer research firm went public in April at $20. But as the excitement wore off, share prices started to sink. Investors can now buy BMEA for under $10 today.
Yet insiders clearly sense an opportunity:
- CEO Thomas Butler bought $3.6 million
- COO/President Rainer Erdtmann bought $312,000
- Director Sotirios Stergiopoulos bought $380,000
I’m also on board. Biomea’s medical director, CEO and president all hail from Pharmacyclics, the firm that developed blockbuster drug Imbruvica and was subsequently bought by Abbvie for $21 billion. And BMEA’s lead drug candidate — a Menin-MLL inhibitor — uses a pathway that other studies have confirmed efficacy in leukemia treatment.
Though Biomea only filed its IND in mid-September, don’t bother waiting for Phase-1 clinical trials: BMEA’s $10 price tag looks like an excellent long-term Moonshot bet to make.
Volt Information Sciences (VOLT)
Finally, we have Volt Information Sciences (NYSEAMERICAN:VOLT), a staffing company whose stock has seesawed between $1 and $40 for the past three decades.
I personally love these types of bets because you can make money even if the stock goes nowhere. And the insiders apparently agree with me, given that they bought shares between $3 and $3.50:
- CEO Linda Perneau bought $10,000
- SVP Nancy Avedissian bought $8,500
- CFO Herber Mueller bought $10,000
- Director Bruce Goodman bought $16,750
- Director Arnold Ursaner bought $16,500
- Director William Grubbs bought $34,000
The tightening labor market is a likely culprit. Employers tend to shell out when labor is scarce; outfits like Volt benefit as long as they can pass fees through to employers.
Case in point: Southwest Airlines’s (NYSE:LUV) next CEO received a job application with his Whataburger meal last week, a new marketing tactic by the understaffed fast food chain. Don’t be surprised if all of a sudden, Volt announces blockbuster profits once again.
The Meme Stocks No Insider is Buying
Selling also gives clues to insider intentions.
Often, I ignore these signs. Academic research (and personal experience) shows that people sell shares for reasons beyond share price. Startup founders are often paid in equity, so they’re forced to cash out shares to substitute salary. And retirements, divorces, kids and 45-foot yachts are all reasons insiders might want to sell.
Of course, then there’s high-priced stocks like AMC Entertainment (NYSE:AMC).
- CFO Sean Goodman sold $1.5 million
- CMO Stephen COlanero sold $151,000
- Director Howard Koch sold $850,000
- Director Adam Sussman sold $711,000
- Director Philip Lader sold $705,000
- Director Gary Locke sold $107,000
You get the idea. Virtually every insider was selling out at prices ranging from $45 to $55.
I’m not ruling out another Reddit-fueled run to $70 — the company’s 20% short interest still leaves the door open for a short squeeze. But if you want long-term value, there are plenty of other movie theater stocks to consider.
|2,596||Number of trades made by the top-trading Senator during a single term in office, according to a controversial article by the New York Times.|
|$260,000||Pfizer (NYSE:PFE) stake acquired by the same Senator in February 2020 after attending a briefing by the Covid-19 task force.|
|37||Months since the Anti-Corruption and Public Integrity Act was introduced in Congress, a bill that would vastly expand financial disclosure requirements for politicians.|
|0||Actions taken by the Senate since the bill’s reading in 2018, per Congressional data.|
More Insider Trading
For those who missed National Coffee Day last week, our own Sam O’Brient makes the case for three coffee stocks. One of these — Krispy Kreme (NASDAQ:DNUT) — has recently seen massive insider buying by a key investor, JAB Holdings. Perhaps the owner of Keurig Coffee knows something we don’t?
And finally, what should you do with Bill Ackman’s Pershing Square Tontine Holdings (NYSE:PSTH), a SPAC with plenty of insider ownership? InvestorPlace’s Joanna Makris sits down with SPAC expert William Birdthistle, who reveals what he would do.
What to Do About Insider Trading
America isn’t the worst country when it comes to insider trading. A study by Nanjing University researchers found that the wealthiest 0.5% of Chinese investors out-earned the market by 16.8% per year. And insider trading is legal in most European countries, according to legal scholars David Haddock and Jonathan Macey.
But American enforcement isn’t what it used to be either. In 2020, the SEC only pursued 33 insider trading cases, down from over 100 per year during the George W. Bush and Barack Obama eras.
Certain cases are certainly hard to prove. If you’re a politician who bought healthcare stocks in January 2020, were you acting on privileged information? Or are you just doing what any pandemic watcher would have done?
What’s clear, however, is that some corporate executives have proven their skills when it comes to trading their own stock. And absent rule changes, Moonshot investors like us might as well hitch along for the ride.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.