Excerpts of this article were originally published on October 4 and 18, 2021, as part of Tom Yeung’s Moonshot Investor series. Investors interested in finding stocks with 100x potential or more can subscribe to Tom’s mailing list here.
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 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.
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 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 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, 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.
On the original 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.