Back in April, I wrote a piece on interpreting insider buying and selling. And yes, it bears repeating that this is distinctly not the “Martha Stewart (NYSE:MSO) kind” of insider trading that will land you behind bars but rather the perfectly legal variety. The SEC requires all company officers, directors, and shareholders owning 10% or more of a company’s voting shares to disclose any dealings they have in their company’s stock. If the CEO of the company is buying — or selling — the stock of the company he manages, the SEC believes the investing public has a right to know.
Company insiders tend to be fairly decent value investors. They don’t get every bend and twist in the stock price right, but they tend to be large buyers near major market bottoms. And near tops, their buying tends to trail off.
Take a look at the recent data, courtesy of GuruFocus, which aggregates insider buying across the S&P 500. A chart reading below 100% means there is more selling than buying, and you’ll see that this is a general rule. Under normal market conditions, insiders tend to be net sellers of the shares they accumulate via stock-based compensation. It’s when their trading deviates from this norm that things get interesting.
Insiders were major buyers near the 2008-2009 bottom and major buyers again during the 2011 sell-off. But ever since, they haven’t had much in the way of noteworthy trading. That is, until you start digging deeper into the data.
The next chart shows insider trading in the real estate sector, which is dominated by real estate investment trusts. The iShares US Real Estate ETF (ARCA:IYR) is essentially a “who’s who” list of the largest REITs by market cap.
Real estate insiders were major buyers of their own stocks near the 2008-2009 bottom, the 2011 sell-off and more recently during the “taper tantrum” of 2013. And interestingly, they are aggressively buying again, today.
REIT prices have been selling off due to Wall Street fears about Fed tightening and rising bond yields. Yet the insiders running America’s biggest REITs are backing up the proverbial truck to buy more.
Who’s right? Only time will tell. The insiders don’t always get it right. As is often the case with value investors, they bought too early in 2007 and saw heavy losses during the meltdown. But overall, they’ve been quite decent at calling bottoms over the past decade. And today… they’re buying.