Editor’s Note: This week’s chart and article come to us from Managing Editor Rachel Gearhart and originally ran in The Oxford Insight, a newsletter exclusively for Oxford Club Members. Rachel’s research ties into an exciting new project that our analysts and editors are developing. So we’ve decided to share it with you. Keep an eye out for more details.
This may be the most eye-opening and useful chart you see all year. Insider buying is one of the top indicators of future outperformance, according to Alexander Green. And the average investor is oblivious to its effect on their portfolio.
In a recent conversation with Alex, he said, “insiders have an unfair advantage when they go into the market to trade.
They have all kinds of material, nonpublic information at their disposal that the average investor doesn’t have. That’s why the government requires them to file a Form 4 with the SEC when they buy shares of their own company.
So earlier this week, we asked our Research Team to do some digging into those Form 4 filings. The chart above is what they discovered.
Over the past year, insiders have been making big moves. Insider buying has increased 17.41% in energy and 14.89% in materials.
And that makes sense...
Insider Foresight
From December 2015 to December 2016, the price of WTI crude jumped around 55%.
The S&P Materials Index was up 14.08%, and the S&P Energy Index was up 23.65%.
According to Alex,
energy and material prices have taken a big jump. Profits will most certainly more than double in the months ahead, and the insiders recognize that. That’s why they’re buying shares of those companies.
On the other end of the spectrum is healthcare and real estate.
Insider buying in real estate dropped 9.26%, likely due to interest rates. And buying in healthcare decreased 17.17% due to the hiccups with Trump’s proposed Obamacare repeal.
Alex argues that the insiders saw the writing on the wall...
Healthcare is such a mess right now. It’s almost as if the insiders foresaw that there would be complications with the Obamacare repeal and replace.
It’s no wonder the sectors performed poorly from December 2015 to December 2016. The S&P Real Estate Index was up a measly 0.01%, and the S&P Health Care Index was down 4.36%.
Undervalued Companies
But that doesn’t mean there aren’t opportunities in these sectors. In fact, subscribers to Alex’s Insider Alert are sitting on 16.1% and 46.5% gains on biotech companies.
Insider buying is at a three-decade low...Most people think this is a negative thing, but it isn’t. Tracking insider buying isn’t a market-timing device.
Aggregate buying and selling by insiders tell us nothing about the outlook for the economy or the market. But individual trades provide valuable insights into the companies where they work.
So insider buying is a device for identifying undervalued companies. The key isn’t how much insider buying is happening. The key is which companies are seeing the most insider buying. That’s where you need to focus.
In sum, insider buying may be down, but it’s still happening. You just have to know where to look.