Today I’m looking into an insider trading pitch from a service I haven’t heard of before — the ad is staged as a “seminar presentation” by Ross Givens about how he follows insider buying signals to pick winning stocks, with the implication that he’ll be finding ideas that match some of the historically phenomenal insider buys he found through data mining.
And that’s dangerous, of course, because the 1,000% gain charts in the presentation that catch the eye of investors are not at all common.
They’re selling a subscription to their Insider Report service, which they say will have regular recommendations of stocks that have insider buying patterns, and Givens is starting out with three ideas in a special report that he thinks can double by the end of the year. The service is “on sale” as part of their hard sell offer at $1,997, but do note that they also advise you to take a “free trial” of a “War Room” service that renews at $97/month, and that the basic service will autorenew at $4,997 a year when your first year expires, with no refunds (as with so many other high-cost letters, if they fail to meet the “guarantee” that you’ll have the opportunity to make $100,000, the recourse is not that you’ll get your money back… but that if you complain, they’ll offer you a second year for free).
I don’t know Ross Givens, and am not aware of whether he has a good track record of picking good stocks or providing an interesting service, but do note that if you’re spending $5,000 a year (or $2,000 for that first year) for advice, then you should think of that similarly to how you think about the expenses that a mutual fund or ETF might charge. If you’re only thinking you’ll invest ten or twenty thousand dollars in this strategy, or even $100,000, then you’re spending a lot for that advice. I’d always hesitate to spend more than 1-2% of your portfolio to get actionable investment advice, research and education, and even that’s a lot when you can just match the market with global index funds at essentially no cost.
We don’t know what the stock picks are, of course, that only gets revealed to subscribers, but we do get some hints about one of them in the email that introduced the ad — so we’re going to look into that now. Ready?
These are the clues about that secret stock pick:
“Now, this particular pick is in the biomed sector, which has been red-hot in the wake of the coronavirus outbreak.
“Over the past nine months, this company’s shares have shot up 213%…
“And the number of institutional funds owning a piece of this stock has increased 112% as well.”
And then we get the insider buying signal that caught Givens’ attention:
“… a key board member dumped $348,750 of his personal money into the stock early last week…
“This particular board member happens to be the former CEO of Foundation Medicine, and he’s also served in numerous senior leadership positions at other leading biotech companies.
“This is the first investment he’s made into his current company…
“And at $350k, he’s definitely showing plenty of conviction.
“I immediately recommended my subscribers invest alongside our friend… “
So what’s this stock? This insider, sez the Thinkolator, is Troy Cox, and the stock he bought recently is Zymeworks (ZYME). Cox joined ZYME’s Board of Directors last summer, and then he bought 7,500 shares on January 27 as part of a secondary offering, at $46.50 per share (yes, that adds up to $348,750, in case you’re keeping track).
This is a development-stage biotech, so they don’t have a lot of revenue and they aren’t profitable — like any biotechs, I imagine they will trade based on clinical results, and while Troy Cox might have a good understanding of the company at this point he shouldn’t know anything about the results of their current clinical trials. The good news, I guess, is that the secondary offering did bring the shares down slightly from all-time highs, so you could buy the stock a little bit cheaper than he did if you’re interested.
Here’s how the company describes itself:
“Zymeworks is a clinical-stage biopharmaceutical company dedicated to the development of next-generation multifunctional biotherapeutics. Zymeworks’ suite of therapeutic platforms and its fully integrated drug development engine enable precise engineering of highly differentiated product candidates. Zymeworks’ lead clinical candidate, ZW25, is a novel Azymetric™ bispecific antibody currently in Phase 2 clinical development. Zymeworks’ second clinical candidate, ZW49, is a bispecific antibody-drug conjugate currently in Phase 1 clinical development and combines the unique design and antibody framework of ZW25 with Zymeworks’ proprietary ZymeLink™ cytotoxic payload. Zymeworks is also advancing a deep preclinical pipeline in oncology (including immuno-oncology agents) and other therapeutic areas. In addition, its therapeutic platforms are being leveraged through strategic partnerships with nine biopharmaceutical companies.”
And that’s about all I know about them. They did post a strategic update/2019 review press release a few weeks ago that includes their current plans, and they do have a couple clinical trials ongoing that could provide stock-moving news at some point this year, though they’re all listed as “enrolling” at the moment and I don’t know of anything imminent.
He also hints at three other picks that are buys right now and that are in his “special report”, the one that I could recognize without going back and recording part of the seminar is Safehold (SAFE), which is a REIT that owns ground leases (the land under the building, not the building itself) — Givens says he thinks the fact that the CEO has been buying and money flooding in means that it will rise by 150-200% this year.
I think that one’s absurdly overvalued at this point, it’s basically the safest part of the real estate ownership structure but also has extremely long-term and low-rent ground leases so the dividend doesn’t appear to have any chance to grow aggressively unless there’s something surprising in their future that I don’t see, and it yields less than 1.4%.
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But, of course, I also sold this one at half the current price back in April because I thought it had topped out at 30%+ gains and was overvalued then, so perhaps I’m just being bitter. It is an interesting idea, I liken the company to providing something like a higher risk TIPS bond kind of return, more or less matching inflation, but apparently other investors see something more. You can make your own call there.
In case you’re curious, it looks to me like SAFE’s CEO, Jay Sugarman, has made small buys regularly under his most recent 10b5-2 stock purchase plan (that’s just a plan that an insider can give to their broker to execute, usually for buys or sells on a regular basis), but he owns 110,000 shares, most of which I assume were granted as part of his compensation (though I didn’t check), and these little buys are for 400 shares or 250 shares at a pop, it appears, so I don’t know whether they mean anything about his sentiment at any particular moment.
What about this idea of following investor buys in general? Is that reasonable?
Before you ask, no, “insider buying” is not the same as illegal “insider trading”. Insiders are allowed to buy their own stock, and investors actually like them to do so… and they are also, of course, allowed to sell their own stock. They just have to file when they buy and sell, and they have a bunch of rules about when they can’t sell around known events, like earnings reports… and they can’t generally sell within six months of when they bought. There are instances of very well-timed insider buys that came right before shocking news, like a corporate takeover or something, but those are the extreme outliers and they often catch the attention of the SEC as well.
There has long been an insider sentiment ETF that attempted to track the 100 stocks with the best insider buying trends, the Invesco Insider Sentiment ETF (NFO) — but it apparently wasn’t successful in attracting new traders, so it is being liquidated as part of the merger of Invesco and Oppenheimer (it will stop trading on February 14, with the net asset value distributed to shareholders).
And there are some newer ones as well, including the Direxion All Cap Insider Sentiment ETF (KNOW). Interestingly, there is no overlap in the top holdings of those two ETFs. They have both trailed the S&P 500 over the past eight years, but the Direxion ETF did outperform for a while (before the S&P leadership popped over to megacaps like Apple and Microsoft that would never be in these kinds of ETFs).
And there’s a Canadian one, too, Horizons Canadian Insider ETF (HII.TO). There were a couple traditional mutual funds that used a long/short strategy (go long insider buying stocks, short insider selling), like the Catalyst Insider Long/Short Fund (CIACX), but as far as I know all of those have been liquidated, too.
So what does that tell us? Well, perhaps that if there’s a real edge to be gained in tracking insider trading, and there has generally been one in all the academic studies that have been done, though the widely-cited studies are all quite old, it’s probably not a large mechanical edge at this point. You can’t just buy the stocks with the best quantitative profiles of insider sentiment and expect to beat the market.
Why? Well, probably because this information is both fully and freely available and well-understood. There are thousands of investment quants building systems that track data to identify stocks with even a little bit of outperformance — everyone wants to be the next Jim Simons and start their own Medallion Fund, not only because they gained something like 70% a year for decades by exploiting mathematical trends in the markets but because that massive outperformance allowed them to charge insane fees. The quants are everywhere, and the computers have never been faster or more powerful… if there’s a mechanical edge to tracking insider trading, the computers have it, not you.
The edge, if there is one, is at least partly qualitative — watching insider buying and assessing the potential based on your understanding of the context of that company and its opportunity and valuation. And that’s partly math, but it’s mostly thinking and analyzing and, yes, in the end it’s estimating and forecasting (that’s what you call “educated guessing” if you have an MBA).
Insider buys are still likely to be a positive indicator, on average… insider sells are still unlikely to give a very strong signal, on average… and the indicators that they tout in the “seminar” presentation associated with this ad are rational ones, but they’re not going to lead to 100% success and they may or may not do as well as the broader market. The edge that insider buying gives, on average according to those studies across thousands of stocks, is generally a few percent a year — which means that if you’re stock picking within that universe your odds might be slightly improved, but there will be lots of both winners and losers.
And, of course, that’s the argument that the newsletter makes — that they can crunch all this data, pulling the Bloomberg insider buying data like any quant analyst or data miner, but that they can also qualitatively sort through this data and find the best opportunities each month. There have been lots of newsletters that follow this kind of “insider following” strategy in the past, since it’s innately appealing to investors that they can follow the best insiders, though I can’t immediately think of any that have stuck around for extended periods of time.
That’s probably because this is not generally a home run sector, with any edge from insider buying generally being pretty small… and if there’s a qualitative edge to be gained by making better picks among the insider buys, following the best ones and ignoring the worst ones, then there’s also a pretty good chance that those stock pickers will make some bad picks as well — after all, it’s certainly not true that insider buying indicators come close to tipping you off to 100% successful trades. Insiders can be dummies and make mistakes, too.
What are those indicators that one should follow in looking for appealing insider buys?
The most important, in my experience is cluster buying from several insiders, preferably C-suite insiders but also members of the Board of Directors (outside investors, like big hedge funds who have outsize positions and thus have to report their trades, have little to no predictive power in the studies that have been done). That was the conclusion made by probably the most influential study of insider buying impact, published by H. Nejat Seyhun in his book Investment Intelligence from Insider Trading in 1998 (he’s still studying this and is often interviewed about insider buying trends).
Second most important is the timing of the buys, insider buys at a time of mass pessimism, with the stock falling, can be a good signal if the buys are substantial — like when so many big insiders were buying heavily during the market crash in 2008 and 2009 to make a public “bet” on the health of their company.
Scale matters, though — If the CEO is paid $1.2 million a year and he buys $10,000 worth of shares when the stock is falling, that’s more likely to be because he knows that investors watch insider buying… if he buys $250,000 worth of shares, for example, maybe that’s a better indicator of real buying sentiment.
The seminar/ad cites two others that they think are important — one is to follow insiders if they have a history of “buying the lows” in their stock, and I guess that makes logical sense but is probably pretty rare (and manual) to find.
And the second is to note “first time buyers” — he theorizes that buying from an insider who hasn’t ever bought stock before is a good indicator of great news coming. There are other reasons for that, of course, some companies really expect their board members to buy shares so often new board members will buy a chunk right away… and it’s also not unusual for a new C-suite appointee to buy some shares as a sign of confidence (maybe that’s what Troy Cox is doing as a new ZYME board member, I don’t know).
It’s also quite common to see massive stock grants to those folks, since the 21st century has shown us that the propensity of corporations to reward their top executives with dizzying quantities of stock has no end — and if they’ve been given 10,000 shares as part of their compensation, it strains credulity to think that buying another 300 shares is a real signal that they know something great is about to happen.
I’d guess that the predictive power of insider buying as a whole has probably shrunk since the key studies were published 20 years ago, and that’s both because quantitative trading and data crunching have illuminated that data and made it easier for traders to try to bet on that predictive power… and because executives are also far more self-aware now and seem to fairly regularly make small purchases with the specific intent of catching the eye of those quants and boosting their stock price.
So I wouldn’t follow insider trading mechanically… but sure, I think that looking at unusual buys by both insiders and institutional investors is interesting and could lead to some good finds (they are often called to your attention from free sites like insidermonkey or many others), and I do think that having the insiders invest their own money in a company is a good thing. They’re not necessarily in possession of secret information about great news to come, and they can be as stupid as the rest of us in forecasting the future, but I like it when executives are long-term shareholders and think like shareholders.
Whether or not the specific ideas being sold by Ross Givens here are going to be great ones, well, time will tell and you can make your own call — the two that I noted above don’t personally appeal to me, but maybe they’ll light your fire. It is worth reading up in insider buying, and certainly it’s worth paying attention to big moves by insiders in stocks that you are otherwise considering… but that doesn’t mean you’re going to get a windfall whenever a CEO gets excited and buys shares of stock in his company.
That’s all I’ve got for you on this one today, sorry that I didn’t catch the clues for the other two stocks from the “seminar” so I can’t name them for you (they were teased as a “deep value” and an energy stock, for whatever that’s worth), but hopefully this gives you a better idea of what Givens is peddling… and maybe those two named ideas will give you a starting point for your own research. If you’ve got thoughts to share on these, or on any other insider buying target, well, feel free to chime in with a comment below — thanks for reading!