This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
Elon Musk Calls on Twitter
Over the weekend, Tesla (NASDAQ:TSLA) CEO Elon Musk asked a simple question of his 62.8 million Twitter followers:
Should he sell 10% of his Tesla stock?
Internet users would probably have voted for “Boaty McBoatface” if they were given a choice. But with only a yes/no answer, they gave one side a slight edge:
58% of the 3.5 million respondents said “sell.”
TSLA shares immediately dropped 5% on the news, wiping about $65 billion off the company’s market capitalization, roughly the value of automaker Stellantis (NYSE:STLA). Imagine if Chrysler, Fiat, Peugeot, Jeep and Maserati instantly disappeared with a Tweet.
The Quieter Insider Revolution
But not all insider transactions are accompanied by such fireworks. The first several days of November saw insiders spend nearly $750 million buying up shares of their companies — about 10x more than usual. Many of these picks, such as biotech startup Alimera Sciences (NASDAQ:ALIM), would see their stocks grow by double-digits within days.
Executives have also been slashing their priciest positions. On November 5, insiders parted with $1.9 billion in corporate shares; the median company sold was 2.2x more expensive than the average S&P 500 component when on a price-to-sales basis.
With executive trading reaching a fever pitch, it’s time to re-evaluate some names and pick out the winners among the bunch.
Promising Companies with Insider Buying
At first glance, it’s tempting to blindly follow insider transactions. Academic studies have found that executives buying shares perform 6% better than the market, a difference that would quadruple a portfolio’s gains over thirty years.
But unquestioned copying of these trades will also land some duds. Many executive purchases are designed to reward insiders with discounted shares, like those at Connecticut-based Bankwell Financial Group (NASDAQ:BWFG). Regular investors just won’t earn the same profits.
To obtain the >20% returns of the Insider Track strategy, we need to play it smarter and find stocks where industry insiders are actively anticipating price increases.
Augmedix (NASDAQ:AUGX) is one of my favorite types of Moonshot bets. Just look at the insiders’ recent purchase history:
- CEO. Bought $150,000
- CFO. Bought $136,000
- COO. Bought $50,000
- Directors. Collectively bought $2.1 million
That’s because the firm works in the opaque world of B2B transactions, where insiders have a clear edge. Few people know corporate demand better than, well, corporate executives.
And that brings us to a $350,000 purchase by Jennifer Carter, chief strategy officer of McKesson Ventures and a former director of McKesson (NYSE:MCK) — the second-largest U.S. healthcare company by revenues. When such a well-placed expert is buying shares, it’s a signal that we’re looking at a great Moonshot bet.
San Francisco-based Augmedix specializes in recording doctor-patient interactions, saving clinicians the time of writing up personal notes. Although the medical scribe industry has existed since the 1970s, regulations for electronic health records (EHRs) have pushed industry employment from 15,000 in 2015 to 100,000 last year.
That’s given Augmedix a chance to shine. By using telemedicine staff based in lower-cost regions (as well as a host of AI tools), the firm has grown revenues 40% year-on-year as in-person doctor visits resume.
With shares trading at a very reasonable $3.80, it’s no surprise that executives have also decided it’s time to make some Moonshot bets of their own. Should Augmedix sign a massive contract in the coming weeks (perhaps with McKesson?) we’ll look back at today’s insider buying and say “yup, we should have known.”
Then there’s E2open (NYSE:ETWO), a supply chain management (SCM) firm that competes against SAP (NYSE:SAP) and Oracle. If you thought AUGX execs were optimistic, just look at insider purchasing for ETWO:
- CEO. Bought $1.1 million
- CFO. Bought $113,000
- COO. Bought $150,000
The investment rationale behind ETWO is obvious to accountants, or if you happen to know the CFO: E2open is growing faster than its public filings let on.
Mind the GAAP
In Q2, E2Open took a $14.2 million amortization charge from its SPAC purchase price allocation. On the balance sheet, that made it seem revenues had declined 11%.
In fact, revenues grew by nearly 20%.
The culprit was “deferred revenue,” a clumsy Generally Accepted Accounting Principles (GAAP) rule that records payments received in advance of product deliveries. Imagine paying for a 12-month streaming subscription upfront — and then imagine the accounting headache on the other end of that transaction, totaling up money paid for services the company has yet to deliver.
Ordinarily, deferred revenues are a rounding error on a company’s financial statement. Few companies generate enough upfront cash to turn revenue growth from positive to negative.
But E2Open is one of those exceptions accounting professors love to hate.
E2Open went public via SPAC, creating an amortizable portion of deferred revenue. In regular English, that means the accountants need to do strange things to balance the books.
In other words, ETWO is a hidden gem that’s expected to grow at 30% over each of the next two years. Corporate executives have recognized the fact and voted with their feet. Will you?
The Pricey Meme Stocks of Reddit
In my October 25 newsletter, I warned that executive selling at Digital World Acquisition (NASDAQ:DWAC) could spell bad news for the stock. DWAC has since fallen 40% as details of the deal emerged. Always the negotiator, former U.S. President Donald Trump will likely squeeze more out of the SPAC before sponsors see a dime from him.
DWAC insiders aren’t the only ones selling shares in meme companies. Since the start of November, fifteen insiders at Palantir (NYSE:PLTR), AMC Entertainment (NYSE:AMC) and Ocugen (NASDAQ:OCGN) have shed a combined $75 million of their holdings.
The Shrinking Meme Stock Window
Traditionalists might point to rising valuations as a reason for meme stock insiders to cash out. In May, the median top-50 r/WallStreetBets firm had a price-to-sales ratio 50% higher than the average S&P 500 firm.
Today, meme stocks are 140% more expensive than their unhyped peers.
The news cycle has also played a role. A study by CNBC found that the average meme stock in June had a lifespan of about 9 to 14 days.
It’s now closer to 3 days.
Consider Ocugen, long a meme stock favorite. Though Redditors have pushed the stock above $12 on multiple occasions, the time it’s spent at those levels has shortened:
- February. 2 days (the stock would remain at $11 for another 12 days)
- May. 5 days, 5 hours
- November. 1 day
Other meme stocks have faced similar volatility. Avis (NASDAQ:CAR) investors last week only had 34 minutes to cash out above $400. Those who wanted >$500 had a 7-minute window to make the call.
As the Federal Reserve begins to taper its billion-dollar bond-buying program, investors should keep a lookout for companies where even executives are throwing in the towel.
What if Zillow iBuyers Were Meme Stock Investors?
Imagine an eccentric billionaire one day knocked on your door.
“I’d like to buy your house,” he says. “And I’ll pay you $10 million for it.”
Thinking it’s a scam, you politely say “no” and go about your day.
The next day, three more billionaires knock on your door, offering $20 million… $30 million… then $50 million to buy you out. And they only give you one day to decide.
Do you take the money and move out? Or do you wait another day to see if anyone else will offer more?
That’s how executives at meme stock companies must be feeling right now. With their corporate-provided shares pumped far above any reasonable level, these executives are faced with a decision on whether to cash out or stay invested.
But as the meme stock mania starts to fade, it’s more important than ever to tread carefully. That’s because if an eccentric investor shows up at your doorstep one day with an offer, there’s no guarantee they’ll ever be there again.
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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.