The Only “Factor” You Really Need to Know

Insider Trades

It’s okay if you ask me: “When the heck did you have time to read that?” I like to think that I’ve found a way to connect my brain to Google Scholar. The truth is that I’ve done so much academic research that if I can’t find a study of interest by now, it hasn’t been written. I want to tell you a little about one of my favorite academic studies. Don’t worry. It’s not dull. Yes, it’s dry – dry as white paint on coal sitting under a cinnamon tree in the desert. But it could make you a lot of money. So… do I have your attention now? Good. Now let’s discuss the only factor you really need to know.

The Insiders Are Your Friend

Intelligent Investing author and Ross Business School professor co-authored a paper two years ago called Do Insiders Exploit Anomalies? The academics discovered that the action of corporate insiders is the ultimate buy signal or the ultimate sell signal.

The authors might cite anomalies like momentum, value factors, bankruptcy metrics, or standard valuation comparisons. They might talk about Book Value and Bollinger Bands. They may combine value and momentum or study areas of mean reversion as I have in the past.

The reality is that none of them can genuinely tell the direction of stock unless insider buying and selling align with the projected outcome. So, if insiders sell their stock when a Buy signal from these other anomalies arrives, investors should walk away and move on to the next trade. The same goes for shorting a stock.

If the insiders are buying when the sell signal arrives, the probability of that stock falling declines. For me, I like to pay attention to the insider signal of the last 90 days. It’s straightforward. But for too many people, it’s just too tempting to ignore the investors and think they know better than the people who run the companies. Don’t do that. It’s a Trap!

How We Use Insider Buying and Selling

There are three distinct types of “Insider Buying” that I eye. One trend focuses on the healthcare industry, one centers on hedge fund activity, and the other tracks mean reversion (stocks that have been falling or stuck in neutral forever and might finally have a signal that they are about to break out.)

Every Tuesday, I’ll look for insider picks that have caught my attention. In addition, I’ll provide a few examples of where an insider buying or selling signal conflicts with what Wall Street is saying about a stock.

For example, Camden National Corp. (NASDAQ:CAC) recently had a lot of buying by different executives. This stock looks reasonably priced and has net margins north of 35%. Check it out. Stephens recently slapped a $53 price target on it, a figure that represents a potential upside of about 14%.

On insider selling, however, I’m looking for when large groups of insiders sell stock simultaneously or… when executives donate a lot of stock to charity. I’ll explain what the latter factor means from yet another incredible study next week.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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