Monday, May 2, 2011

Insider Trading

The only clear message on insider trading is lots of insider buying. This can tell you that insiders really feel that their company is undervalued in the market. There can be many reasons for this. Insiders could feel that a company is being unjustly punished for a recent bad quarter or year. For insiders to buy, they much also feel that the company has a bright future.

However, do not take a company’s repurchase of their shares the same way. Companies repurchase shares for lots of reasons, and from what I have read, they do not do their repurchasing at low stock prices. However, I do take increases in dividends as Management believes in the ability of the company to provide future earnings and cash flow to cover the increase in dividends.

Insiders with options probably sell because they feel that options are part of their pay. Also, they may not want to hold lots of stock in the company in which they work. Look at what happened to Enron Corp. I understand that lots of employees had stock in this company and also had lots of their pension money in this company. When it when bankrupt, they lost their jobs, their savings and their pensions. Enron showed that you should not be too dependent on the company in which you work. If the company goes bankrupt, you can lose a lot. In bear, markets there are always companies that go bankrupt.

Looking at Insider Trading Reports shows how much company’s officers own in both shares and options. I must admit, I do not much care for companies where insiders have masses amount of options and few shares. The push to give options to company’s insiders was to align insiders interest with the shareholders. But this is not what occurred. At some companies, insiders are cashing in options in the 8 figures. Look at my recent review on BCE where I found that the CEO sold off $43.7M shares. He was cashing in on his options.

I look at reports to see what is happening. Is there a lot of insider selling or insider buying? I do not like it when there are massive amounts of Insider selling. I recently reviewed BCE and found that the CEO has sold off some $43.7M in shares (from Options). See my blog entry at BCE. Insider buying is a good indication of the insider’s faith in the company as is when insider retain the options they are given. (I also consider management has faith in the company when they increase the dividends.)

Some of the big companies I owned seem to lately have an orgy of insider selling and not only BCE (TSX-BCE). Enbridge (TSX-ENB) insiders have recently sold almost $50M. See my blog entry at Enbridge. Also, Canadian National Railway (TSX-CNR) insiders have sold some $27M. See my blog entry at CNR. Compare this to some smaller insider ownership companies like AltaGas Ltd (TSX-ALA) where the CEO owns some 1.5% of the company and there is some insider buying. See my blog entry at AltaGas. Also, take a look at TECSYS Inc (TSX-TCS) where insiders own 60% of the company. Here there is a bit of insider buying and no insider selling. See my blog entry at TECSYS.

I also like to know if there are large portions of the shares owned by someone or some company. I do not mind companies with a large family ownership position. However, not everyone feels this way though. Look at recent money spend to get rid of Stronach from Magna and related companies. There are pros and cons to family ownership of companies. The best pro is that these companies tend to have very low debt and good debt ratios. A con would be that family secessions could be tricky.

Wikipedia does a have are large item on this subject of Insider Trading. Reuters gives interesting information on institutional buyers of companies. See Reuter. Note that for Canadian companies you have to follow the stock symbol with “.to”. For example, for BCE use “” to get information on this stock.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

1 comment:

  1. Thank you for explaining that so clearly, I appreciate it!