February 7th, 2012

How Reliable Is Insider Buying as An Indicator

I don’t know whether insider buying should be considered a part of the fundamental or technical arsenal but as far as I’m concerned, it surely isn’t a very reliable indicator to use when deciding whether to buy a stock or not in a market that appears to be on the verge of breaking higher in a major way.  The indicator I’m referring to is “insider buying”.  SeekingAlpha just ran a piece entitled “4 Stocks With Heavy Insider Buying” and the stocks mentioned were: IEP (Icahn Enterprises), RDEA (Ardea Biosciences), HES (Hess Corp) and WEN (Wendy’s Corp).  As Cramer would say, “Yes, you’re diversified!” …. but is it anything else?

According to the lead in the SeekingAlpha story,

“There can be many reasons why insiders might sell their own company’s stock: a big personal purchase like a house; cash to fund a charity; and many other reasons.  Whichever the case is, insiders usually buy shares because they think the stock is a bargain and has upside potential. When mutual funds or hedge fund managers (and even everyday investors) see a lot of insider activity, it most definitely triggers a reason to take a second look at the company.”

My “stock chartist’s” view of each of the stock’s charts is the none contain sufficient evidence in the form of trend or pattern to make a compelling argument for buying any of them today. In other words, they may be great buys in the future but there are many other stocks available with better charts that are worth taking a risk on today.

  • IEP: “the most intriguing news is the fact that the chairman of the board reported to have bought 411,755 shares at $36.79 amounting to a total of $15,149,825. I believe this warrants a second look.”  That may be true based on “insider buying” but it’s going to be a while before momentum builds sufficiently to cause the stock to break out of its 3 1/2 year horizontal symmetrical triangle.  It would take a move above 41.50 and preferable 45 for a buy signal:
  • RDEA: “The chart shows a possible trend reversal for this stock, and perhaps best of all, a director just bought 876,828 shares at $17 amounting to a total of $14,906,076, and another director bought 426,470 at $17 amounting to $7,249,990.”  That’s a nice commitment but wouldn’t you be upset if directors lacked confidence in the firm on whose board they served and instead were dumping the shares?  When you look at the chart, you see a stock that ramped up nicely after its IPO but then faltered during the financial crisis crash.  It’s to early to tell whether the current pattern evolve into a buyable double-bottom?
  • HES: “the most intriguing is the fact that the Chairman of the Board and CEO just bought 91,250 shares at $54.79 amounting to roughly $5M.”  I concur!  I see little intriguing in the stock chart to warrant a purchase today.
  • WEN: “Recently there have been a total of nine directors buying up shares in the $4.75 – $4.87 range. Each director bought a total of 875,000 shares, a total of 7,875,000 shares amounting to roughly $37M.”  Restaurant stocks have been hot lately but WEN hasn’t seemed to be able to participate.  Perhaps it’s lack of participation and it’s absolutely boring chart (although filled with potential) pattern, low price and potential high volatility makes for an interesting speculative buy.

Bottom line: I’ll ignore insider buying and stick with good charts. Of the four, I’d put my money on WEN joining the rest of the Industry Group leaders.

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