Webcast #23: Insider Buying (8 minutes)

2021 represented a record year for insider selling. A total of $170 billion of stock was sold by company executives.

So far, 2022 has been a turbulent year for investors. The Russian invasion, escalating energy prices, and higher interest rates to tame inflation have caused many to reduce the valuation multiple they are willing to pay for stocks. Consequently, markets are under pressure. The S&P/TSX Composite Index is down 5.3% since the start of the year while the S&P 500 and the Nasdaq have contracted 15.6% and 24.5%, respectively.

There’s lots of reasons why an executive might sell a stock – estate planning, divorce, or personal reasons. But the only reason to buy a stock is if the person thinks it’s going higher.

The most memorable insider purchase took place in 2016 by JPMorgan’s CEO, Jamie Dimon. The S&P 500 had dropped almost 11% in the first five weeks of that year when Dimon disclosed on February 11 that he bought 500,000 shares of his own company’s stock. The purchase represented about $26.6 million at the time and coincided with the bottom of the market. The S&P 500 then rallied and finished the year 10% higher than where it started at the beginning of the year (and 22% higher from the date when Dimon purchased his stock).

Lately, there have been some notable insider purchases by several CEOs at various publicly traded companies.

– Uber: $5.3 million

– Schwabb: $9.5 million

– Shopify: $10 million

– Spotify: $50 million

In April, insider buying was 17% above its five-year average. The purchases were led by insiders in the health, technology, and financial sectors.

While insider buying is one of many indicators we look at, the recent trend is encouraging. It shows that the executives are backing their own words by purchasing their employer’s stock. The recent pickup in insider purchases suggests that the contraction in the market represents good value at these levels to company insiders.