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Corporate insiders are bullish on small-cap stocks and those trading for low price/earnings and price/book ratios. That bodes well for small-cap value stocks.
This comes at a time when insiders are neutral on the overall stock market’s prospects over the next 12 months. That’s a significant improvement from where they stood in January, when they were more pessimistic than they had been in a decade.
By corporate insiders, we’re referring to corporations’ officers, directors, and largest shareholders. They are required to more or less immediately report to the Securities and Exchange Commission any transactions involving their company’s stock. Many on Wall Street pay close attention to patterns in insider transactions, on the theory that insiders know more about their company’s prospects than do outsiders.
Nejat Seyhun, a University of Michigan finance professor who is one of academia’s leading experts on the behavior of insiders, has found from his research that this theory needs to be amended. Though officers and directors are worth following, he says that the largest shareholders do not, on balance, have any privileged insight into where their companies’ stocks are headed.
In an analysis conducted for Barron’s, Seyhun stripped the transactions of these largest shareholders from the latest insider data, allowing us to focus on the actions of the more insightful officers and directors.
The accompanying chart reports what Seyhun’s data shows. Among all publicly traded companies with any insider transactions this month through Sept. 24, 25.2% had more of their shares bought by these insightful insiders than sold. Though you might think that’s an alarmingly low number, it actually is quite close to the historical average. That’s because the average insider sells more than he or she buys, since a big chunk of his or her compensation comes in the form of equity grants.
Your reaction to this data depends on whether you see the glass as half full or as half empty. On the one hand, the insider buy ratio is a lot lower today than it was in March of last year, when it reached an unusually high 62.4%. On the other hand, it is higher than the 17.4% level it fell to earlier this year.