Insiders Beat the Market, But Are They All Good Signals? Reviewing Recent Examples

Mike Stein - Business and Product Development Lead

[Click here to read this article on EZ-Insider]

Following insider transactions for investment insights is hardly a new strategy, but interest was heightened last week following the publication of an article in Bloomberg Businessweek that focused on how insiders routinely beat the market. Included in the author's smart analysis were some examples of "star" insiders as compiled by a competing service. We thought we would take a closer look at those examples to see if they are among the insiders who we would also recommend to our subscribers:

1. Steven Mihaylo – Crexendo Inc. - As noted in the article, CEO Mihaylo has done well in recent years including turning "a three-month profit on 83% of his trades over the past five years even as Crexendo's shares have seesawed." While this may be true, as shown on the graph below Mihaylo's full trading history complicates that analysis.

Mihaylo has benefitted from the stock's upswing following its low in early 2016 on his recent trades; during this period it would be hard for him to have been wrong given the upward trajectory. In contrast, when looking at Mihaylo's entire history he actually earns an average three-month return of -0.3% on his first 64 transactions. While we agree that Mihaylo has done well recently, his full transaction history suggests that buying along with him would be analogous to flipping a coin.

2. Snehal Patel – Greenwich LifeSciences Inc. - Our competitor touts this insider as a star because of their admittedly incredible returns, as their purchases have earned a return of approximately 500%. However, as the author points out and is shown on the graph below, those trades are over performing because they "preceded the announcement of promising results from a cancer drug trial." While those returns are good enough to make every investor envious, Patel's lack of insider trading history doesn't imply that there is any reason to think that they will continue to do well in the future.

In fact, when looking at Patel's April trade that didn't precede positive trial results (as shown on the graph above), shares have actually fallen marginally.

3. James Filler – Century Bancorp Inc./ServisFirst Bancshares Inc. - Here we agree with the conclusion that Filler is an insider with an impressive track record, as he earns our highest proprietary Insider Rating at both companies. At SFBS Filler did a great job timing their transactions in dips in price and before major rises.

While he has done well at CNBKA, a problem with using Filler's trades as an investment signal lies in his extreme frequency of buying, to the point that it seems like he is buying regardless of share price, rather than picking specific entry points for the stock. Because he buys all the time at CNBKA, there is a continual reinforcement of a buy signal regardless of share price. As shown on the chart below, Filler's returns generally follow the overall trends of the stock, suggestion he benefits from the trends in the share price rather than from calculated bets.

While some insiders do suspiciously well at times, not all insiders with good returns make for good investment signals. Simply looking at what an insider has done recently runs into the problem of an insider's returns being artificially high due to an upward market cycle or other factors unrelated to their insider status. Additionally, stellar returns on one transaction may make investors envious, but are ultimately unrepeatable by investors on the street. What we look for when picking out insiders on our platform is a demonstrated history of repeated success over a long period of time, rather than simply looking at the insiders who were able to garner the highest returns.

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The Washington Service Research Team