Insider stock purchases

[GreenEggs]

Do you pay attention to large insider stock purchases when looking for stocks to buy? I've recently been looking for recent large purchases and have found a few that seem interesting.

Why would company executives and board members purchase millions of dollars of their stock if they didn't expect to profit well from it?

 

[Sunset]

Unless they know something about the future, it might just be a "signal" to the other shareholders, employees, etc that everything is great. A confidence booster.

It would mean more if they purchase it at the market rate, and not a discount rate.

 

[GreenEggs]

If an insider knew that the company was planning to repurchase its shares that would be a good reason to buy up a lot of shares, right?

 

[Sunset]

If an insider knew that the company was planning to repurchase its shares that would be a good reason to buy up a lot of shares, right?

I don't think so, companies always announce they are going to spend up to X Million/Billion buying up their own stock. Usually when it's super high priced.

 

[LOL!]

It could be a desperate attempt to get an outsider to buy the company and keep it afloat and stave off bankruptcy.

It is an extremely well-known behavioral finance trap that folks will choose the solution with even a 5% chance of succeeding over the 95% probability that things are going under. It is the premise of many movies. But this ain't Hollywood anymore.

 

[HarveyS]

I've tried this in the past with no success. Without hard data, I agree with earlier posts. I would also add that perhaps the "purchases" are just options exercises or grants of stock from the board that were already made and priced into the stock by those with a more detailed analysis.
Insider buys are a good sign, but there needs to be more.

 

[cathy63]

Insiders can't just go out and buy a large block of their own company's stock without running afoul of the SEC. A large buy is usually part of a 10b5-1 plan. https://www.investopedia.com/terms/r/rule-10b5-1.asp

 

[njhowie]

Insiders can't just go out and buy a large block of their own company's stock without running afoul of the SEC. A large buy is usually part of a 10b5-1 plan. https://www.investopedia.com/terms/r/rule-10b5-1.asp

Insiders merely need to file a Form 4 https://www.investopedia.com/terms/f/form4.asp with the SEC within 2 business days after their transaction (buy or sell), though I have periodically seen some go well beyond the 2 day filing rule and there is never any enforcement action. There is no stipulation regarding how much they may buy or sell. However, should an insider make a very large buy or sell, it could attract scrutiny if he/she was in possession of material non-public information.

Generally, companies have blackout periods where insiders cannot initiate any transactions. An example of this is the period a few weeks before end of quarter up until public announcement of the quarterly earnings, where they are in possession of material non-public information.

The 10b5-1 plan allows the insider to have transactions take place at any time, including times where they normally would not be allowed to occur. In the example above, where transactions may be forbidden during the weeks before/after end of quarter, if a 10b5-1 plan is in place which specifies in advance the parameters which shares are to be bought/sold, then that takes precedence over the blackout which may be in effect, because it is generally done well in advance. The plans, when initiated, generally are in effect for a period of a year or more, or up until some fixed number of shares have been bought/sold.

Also, be aware, 10b5-1 plans are most always not filed with the SEC. You cannot go to sec.gov and search for insider 10b5-1 plans, where it is trivial to search for Form 4's. I have seen a handful of insiders attach their 10b5-1 plans to an 8-K filing for purposes of advertising it, so other investors would take notice. In the cases where I've seen this done, it was by unscrupulous insiders who were trying con investors, which eventually became clear.

So, an investor may not be aware that a 10b5-1 plan is in place if the insider or company has not made it known. Generally, if not made known by the insider when initiated, it will be specified in the Explanation of Responses section of the Form 4 when transactions take place. Filing of the Form 4 is always mandatory.

Here is an example:
https://www.sec.gov/Archives/edgar/data/1018724/000112760220013168/xslF345X03/form4.xml

Explanation of Responses:
1. This transaction was effected pursuant to a Rule 10b5-1 trading plan adopted by the reporting person.

 

[njhowie]

I've tried this in the past with no success. Without hard data, I agree with earlier posts. I would also add that perhaps the "purchases" are just options exercises or grants of stock from the board that were already made and priced into the stock by those with a more detailed analysis.
Insider buys are a good sign, but there needs to be more.

All of this information is readily available from the SEC at sec.gov. The Form 4 filings are explicit as to the type of transaction, whether a market purchase, option exercise, or grant/award.

I track insider transactions very closely - wrote software years ago which tracks them and generates daily reports on them to this day.

One way which the insider will look to "hide" intent is by making a purchase just prior to or just after a stock award/grant, where the purchase becomes a cheap form of advertising - Form 4 filings are free and get immediate attention from websites and financial outlets which track them. So, while everyone will focus on an insider purchase of 10,000 shares, he/she may have received 100,000 shares for free just prior to or after the purchase - making their effective purchase price 10 cents on the dollar (in this example). You almost never see an insider transaction publicized relative to their other non-outright purchases/sales. Again, in the case of a purchase, it can be a cheap form of advertising, looking to entice others to buy.