Insider Trading Galore
On Monday, I introduced “The Inside Track” strategy, a trading system triggered by unusual insider buying.
The logic is deceptively simple: corporate insiders have some of the best insight into the companies they run. And though they technically can’t trade on material non-public information (i.e., next quarter’s financial statements), it turns out that many tend to act like five-year-olds who are left unsupervised with a chocolate cake.
In 2018, Elon Musk famously bought $45 million of Tesla (NASDAQ:TSLA) stock just as the firm was finalizing closed-door talks with bondholders. His gamble would net him 150% returns.
Other CEOs have been even more unscrupulous. As I mentioned on Monday, Snehal Patel of Greenwich LifeSciences (NASDAQ:GLSI) earned 488% after making four trades that preceded announcements of promising clinical trial results. It’s the equivalent of having your cake and eating it too.
Alas, malicious insider trading is harder to prove than figuring out who took your cake. In 2020, the SEC pursued just 33 cases of illegal insider trading. It seems regulators think Mr. Patel’s positions were simply incidental to the workings of a great market timer.
Some, of course, will feel angry with a system that’s favored insiders since U.S. stock markets opened in 1792. But realists will understand that if we can’t change a system, we might as well make money off it. If you can’t beat ‘em, why not join ‘em instead?
The Inside Track
For those willing to buy alongside insiders, the data confirms our suspicions: corporate executives are exceptionally good market timers.
One study by a team of MIT researchers found that insiders outperformed the market by 6% annually over 21 years. That seemingly minor advantage could have turned a 50-year-old’s $200,000 gamble into $3.2 million by age 71. (Index fund investors would have to settle for $1 million).
Following high-performing stockpickers adds to greater rewards. A separate survey by financial website TipRanks found that top-ranked insiders subsequently outperformed the market by a whopping 15% annually. That same $200,000 wager would net investors a cool $15.4 million.
Perhaps the most astonishing thing: these advantages are available to regular investors. A working paper by the National Bureau of Economic Research (NBER) showed that five-sixths of returns are still available just 5 days after insiders make their trades. Though insiders can wait up to two business days before reporting trades to the SEC, these delayed filings are still useful in gaining a trading edge.
How to Use the Inside Track
Insiders tend to buy stock in three ways.
- The Early Warning Bell. Insiders are often the first to know about changes in customer demand. These “early warning” purchases — say, strong insider buying at staffing firm Volt Information Sciences (NYSEAMERICAN:VOLT) — tend to signal broader shifts in the economic outlook.
- The Gold Mine Discovery. Occasionally, insider purchases are a bet on a specific product or upcoming discovery. Heavy insider buying at biomedical startup Biomea Fusion (NASDAQ:BMEA) might be a signal of positive clinical results, while purchases by executives at mining exploration firm Osisko Mining (OTCMKTS:OBNNF) suggest a literal gold mine discovery.
- The Star CEO Investor. Finally, some bets look like those made by Elon Musk and other CEOs — insiders with incredible investment track records. These individuals tend to do their heaviest buying just as Wall Streeters are throwing in the towel.
That last strategy — the Star CEO — brings us to today’s top pick: a Moonshot so wild that even yours truly needed to think twice.
The Biggest Moonshot You’ve Never Heard Of
Last week, The Metals Company’s (NASDAQ:TMC) shares looked a lot like a “busted SPAC.” Shares of the undersea mining startup had fallen from its $10 merger price to under $4. Even I wrote it off as “not interesting enough to buy” and left it out of the newsletter.
All that changed this week when CEO Gerard Barron bought 34,000 of the controversial company’s shares. Suddenly, it was registering on the “Star CEO” scale.
That’s because Mr. Barron has a history of well-timed bets. In 2001, the tech entrepreneur invested $226,000 into Nautilus Minerals, an early deep sea mining company. He would later sell that same stake for $31 million in 2008 — a 140x return.
Today, he’s making a similar bet on an equally controversial firm — his own.
Can TMC Revolutionize Mining?
The Metals Company is a firm straight out of a science fiction film. By mining the seafloor for polymetallic nodules, the firm aims to produce metals for electric vehicle (EV) batteries at a fraction of current costs.
Oceanographers have known about these potato-sized manganese ores since 1868 when a scientific expedition stumbled across them on the floor of the Arctic Ocean. But terrain obstacles — including blocks, cliffs and potholes — have stumped surface-based dredging and hydraulic mining systems for years.
That’s where The Metals Company comes in. The startup, run by charismatic founder Gerard Barron, plans to use undersea robots (rather than 5,000-foot hoses) to suck up ore from the seafloor. It seems that advances in unmanned vehicles have finally created a tipping point moment for undersea mining.
TMC’s timing is also serendipitous. Today, replacing the battery of a $31,000 Chevy Bolt costs $15,734, per a statement confirmed by Chevrolet’s investor relations department. With EV sales set to rise another 10x by 2030, it’s no surprise that TMC’s stock initially spiked 25% after its merger announcement.
…Or Will it Sink into the Abyss?
Without Mr. Barron’s investment, however, TMC looks like a sinking ship.
Though the UN’s International Seabed Authority (ISA) has issued at least 29 licenses for seabed exploration for nodules, it has yet to award one for actual mining. Even TMC admits in its official filings that commercial production remains at least two years away, if it ever starts at all.
The reasons are clear: scavenging the ocean’s floor for metal nodules disrupts the marine ecosystem. No matter how gentle TMC’s robots are in sifting for metal, they will be irreparably disturbing one of the final untouched areas on earth.
In the worst case scenario, all 29 of these exploration-licensed companies will suffer the same fate as their predecessors: years of cash burn followed by bankruptcy.
The Star CEO Steps In
But TMC’s CEO/founder has an uncanny ability to get his way. In 2019, Gerard Barron managed to convince the island nation of Nauru to break traditional UN procedure and allow him to address the ISA Council directly. And the 54-year-old CEO has already acquired mining rights to the country of Tonga, seemingly by sheer force of will.
Many of these roguish moves will remind investors of the 20th-century oil wildcatters — drillers who skirted the law and become some of the wealthiest Americans of their time.
Today, Mr. Barron is signaling a similar story with his 34,000-share purchase of TMC (and Director Andrei Karkar likewise doubled down with a $10 million investment). Though environmentalists and value investors alike will balk at the seemingly “greenwashed” firm, these are the types of bets that the Inside Track strategy tends to dig up.
Easy Wins or Moonshots?
Sometimes, the Inside Track strategy finds easy wins. Executives buying shares at Volt Information Sciences are getting in so cheaply that their $3.40 entry price could yield a 3-5x return as labor markets tighten.
Other times, people are going for bigger gains. Last week, the CEO, chief medical officer and general counsel of Onconova Therapeutics (NASDAQ:ONTX) joined their peers at Biomea Fusion in betting on their own horse. These wagers typically pay off somewhere between 2x and 4x on successful clinical trials, and 10x to 30x if drugs make it to production.
Finally, there are the total Moonshots — firms like The Metals Company and Tesla, which promise to change entire industries. These companies often have controversial CEOs who seem one tweet away from disaster. But investors willing to put up with the risk could net 50x to 100x rewards.
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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.