How Much Does Insider Buying Matter

One topic that has always interested investors is the buying and selling actions of stock by management and other "insiders." In this case, insiders could also be members of the Board of Directors.

It is a very logical approach. 

Management and insiders should know more about a company's prospects than anyone else. Their actions around the stock could signal the company's health.

The reality, though, is much more nuanced.

There is an old Wall Street saying, "There are many reasons for an insider to sell a stock; there is only one reason to buy." However, there can be many reasons for both.

In today's HX Daily, we will talk specifically about insiders' buying actions.

As mentioned above, management's intentions regarding buying shares ARE more straightforward than selling.

While selling could be driven by taxes or other factors, buying most often DOES indicate a positive view by management.

There can be some exceptions, though, when you see new management come into a company.

Sometimes, the new management must buy the stock as part of their latest contract. Purchasing the stock might also trigger additional share grants.

We may have seen something like this by the new CEO of software company Snowflake Inc. (NASDAQ: SNOW). He recently bought $5 million of shares in the open market, and we believe this triggered a grant of $5 million worth of Restricted Stock Units or "RSU"s.

This doesn't mean that it isn't still a positive. $5 million is real money for anyone, and buying the shares is still a sign of his support for the company. It perhaps is just not as strong a signal as buying shares without any other factors playing a role.

An example would be the open market purchase of shares by Lululemon Athletica Inc. (NASDAQ: LULU) Director Martha Morfitt. She recently bought $1.4 million worth of shares, bringing her total holdings to over $35 million.

There may also be some other reason she purchased the shares, but we couldn't find anything on it.

With the stock having recently traded off, this can be taken as a sign of confidence by someone who should know the company's situation very well.

Another interesting subtlety is looking at WHO is buying the shares.

We have an old friend who looks for companies where the Chief Financial Officer (CFO) or General Counsel is the one buying the stock.

He believes that these officers tend to be less promotional than the CEO or board members, which is a good sign of the company's prospects.

We don’t disagree and think it can be a good signal.

Another factor to study is how often the insider buys shares and whether this buy is any different.

We recently saw an open market purchase of almost $20 million of Sphere Entertainment Co. (NYSE: SPHR) by long-time controlling shareholder Jim Dolan.

We don't have complete visibility on whether other factors may have been involved in this purchase. Still, Dolan very rarely has purchased shares in his companies in the open market.

The rarity of his purchases makes this buy stand out.

How much should insider buying play a role in your investing decision?

We would answer that it should play SOME role, but we would rarely use it as the primary factor behind buying a stock.

Our analysis utilizes what famous investor Steve Cohen calls the "mosaic" approach.

This means taking each piece of information as an individual “tile” that you use in building your overall investment picture and decision.

In this sense, we will use insider buying as another positive signal when looking to buy shares and consider it with other factors.

We think monitoring insider buying can be valuable in your investing tool kit.

Watch on Youtube as Enrique is joined by a reader to review our new FREE IDEA.

We give these out very rarely, don’t miss your chance to learn about this unknown stock that will power the AI revolution and could double from here!

Check out the idea and subscribe to HX Legacy for more ideas like these!