Insider decisions can be an extremely valuable tool for any investor. If one is able to understand and interpret this data it can be used, in conjunction with other data points, to help form investment decisions.
Insiders are the key executives and beneficial owners of companies who are required by the SEC to file a form 4 each time they perform an action with the stock (including Buying, Selling, and Exercising Options). This data is made available to the public once it is filed. Insider Decisions are important because they can give an investor an indication of an insider’s assessment of both a company’s prospects and that of its stock.
The Value Line page houses the Insiders Decision box in the upper left hand corner. The box has three lines, “to Buy”, “Options”, and “to Sell”, along with columns listing the most recent nine months and a series of numbers below the corresponding months.
The three rows in the Insiders Decision box refer to the different actions an insider can take with a given stock. The first row, “to Buy”, reflects how many insiders purchased shares of the stock each month for the past nine months, with the number of insiders that bought shares listed under the corresponding month. The second row, “Options”, shows how many insiders exercised options in each of the past nine months. The last row, “to Sell”, presents the number of insiders who sold shares of the stock in the past nine months.
To understand what is going on with insider activity for a given stock, you would look at the Insider Decisions box and try to identify trends. If a significant number of insiders have purchased shares over the past few months, it could be a bullish sign and may signal that insiders think the stock price will rise. On the contrary, if insiders have been selling a stock it might be viewed as a bearish sign, meaning the insiders think the stock price will decline.
Insiders buying shares is usually a positive sign for a company. It should be noted that in some companies, key officers and board members are required to participate in stock purchase plans, which force the insiders to purchase shares at certain times. When looking at stock buying trends, it is important to note the size of the purchase. Using the Value Line Survey’s “Major Insider Transactions” page, which is included in the Selection & Opinion section of every Issue is useful in determining whether an insider purchase was meaningful. For example, an insider buying 10,000 shares is significantly more telling than that same insider buying 100 shares. The number of insiders buying and the size of the purchases can help an investor determine if the insiders think the stock will rise. The higher the frequency of insider buying activity, the more positive the sentiment.
It is important to note that insiders might choose to sell shares of the stock for various reasons unrelated to their sentiment about the particular stock or the company in which they are an insider. For example, an insider may sell shares to alleviate an immediate cash need. An insider might also sell shares to diversify his/her own investment portfolio, which could be heavily tied to the share price of the company’s stock. It is for these reasons that it is far more telling for a cluster, or large number, of insiders to sell stock than it is for one individual.
The exercising of stock options by insiders is not a telling statistic. Insiders may exercise their options for any number of reasons, and often there is a set exercise schedule, wherein they are only allowed to exercise options at set future dates. This practice has gained traction over the past few years following the public outcry over executive compensation resulting from the financial crisis.