In this article, we will take a detailed look at the 10 Buy-Rated Stocks with Latest Insider Purchases. For a quick overview of such stocks, read our article 5 Buy-Rated Stocks with Latest Insider Purchases.
Insider trading and its relationship with stock returns is a topic that has interested researchers for a long time. When insiders buy their own company shares, does that mean they know something outsiders don’t and they are piling into their company shares to profit in the long term? Many research papers would answer this question with a “yes” albeit with many ifs and buts. For example a research paper entitled “Insider Trading Patterns” tries to find out why and when insiders buy their own company names. The research, conducted by Lee Biggerstaff, David Cicerob and M. Babajide Wintoki, says that duration is very important while analyzing insider trades. When insiders buy or sell a stock for a long period of time, they may have a “longer-lived” informational advantage.
Insiders Preserve Their “Informational Advantage”
The research paper also concludes that insiders tend to “preserve” their informational advantage by disclosing their trades usually after the market closes. They also trade in a sequence of trades and trade more shares because of this disclosure pattern.
What does “sequence” of trades mean? The research paper says when an insider has an informational advantage of significant importance, they will try to avoid “conspicuously” large trades and instead try to spread their trades over a long period of time leading up to the key event about which they might be aware of. For example, if an executive is aware that his company is about to lose a key business relationship in the future, or an important R&D project is progressing positively towards its goal, they would begin to initiate insider trades with by careful sequencing instead of immediately buying or selling company shares in hefty amounts.
“Prior research has shown that larger trades tend to move prices and trade prices convey information about firm values to the market (Meulbroek, 1992; Gloston and Milgrom, 1985). Optimal trading strategies based on private information therefore involve sequences of trades to avoid sending strong signals (Kyle, 1985). In addition, according to a 2000 internal S.E.C. memorandum discussing the investigation of insider trading, one of the most relevant factors is the size of a trade, so those trading on private information have an incentive to avoid conspicuously large trades (Foster, 2000). Sequences of trades spread over longer horizons may therefore be motivated by private information that takes longer to be incorporated into prices. The alternative null hypothesis is that insiders spread their trades over longer periods of time when they are trading for liquidity or diversification purposes. There may be less immediacy to these trades if insiders are not trying to exploit a temporary informational advantage. Insiders may spread these trades out over time because they still face the reality that the market has limited depth and larger trades tend to move prices, which could cause them to realize less favorable average trading prices. Consistent with this expectation, Lebedeva, Maug, and Schneider (2012) demonstrate that insiders spread their trades out over time when they face liquidity constraints.”
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Which Industries are Seeing Insider Buying in 2024?
Are insiders buying or selling in 2024? According to an interesting analysis conducted by CDT Capital Management, a long-only hedge fund that keenly tracks insider activity, insiders started piling into the market in March after a two-month “hiatus.” CDT Insider Sentiment Ratio was 2.14 in March, which shows a strong insider sentiment. Among the most active sectors seeing insider activity in March 2024 included Software, Restaurants and Banks.
CDT said that insiders are apparently late to the party and it’s puzzling why insiders, who are usually contrarians, started buying during the Q1 rally. Many believe the market rally led by AI is spreading to other stocks and CDT also thinks this explains the latest insider buying activity:
“Our conclusion is that we suspect the market rally that we observed in Q1 has and will likely continue to broaden out to other sectors of the market. With more and more insiders raising their hand to proclaim untapped value, we expect the sectors of the market that have not received their fair share of attention will likely get some of the limelight in the near to medium term.”
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