Peter Lynch once famously said that "insiders might sell their
shares for any number of reasons, but they buy them for only one:
They think the price will rise." Watching
what insiders are buying
is a great way to generate investment ideas.
But investors need to be aware that not all insiders are created
equal. Some companies' CEO, CFO and directors are much more
rational than others. When generating ideas from insider trades,
it is important to look at the track record of the insiders.
Consider the insider buys at Wal-Mart (
WMT
). Large trunks of insider buying activities were observed in the
years from 2008 to 2010, when the giant retailer's stock was
traded at decade lows of around $50 and
historical low valuations
. Wal-Mart directors
James Breyer
and
Aida Alvarez
, vice Chairman Michael Duke, etc., kept buying shares. These
shares have since appreciated 50%, and Wal-Mart stock is now
making all-time highs.
This is the insider trade history of Wal-Mart:
If buying Wal-Mart following its directors has been profitable,
it can other times be disastrous to following insider buying
blindly, even if it is the company's CEO. A high profile example
here is Chesapeake Energy (
CHK
). The company's CEO Aubrey McClendon continued to buy Chesapeake
stocks in his own account as the stock prices ran up from the
$30s to $50s before the financial crisis,
on margin
! By October 2008, he had accumulated more than 32 million
shares, which was valued at more than $2 billion at the peak of
the stock price. Then the stock market collapsed, and he got a
margin call and has had to sell almost all of the shares at an
average of $18 each. He lost billions with his purchases. Now
Chesapeake stock is traded at $18 and change. He is buying
aggressively again:
If you plan to follow him into Chesaspeake, make sure you are
aware of what happened before.
A few years back, Wal-Mart management received complaints for
poor stock performance since 2000. The management argued
correctly that since Wal-Mart was traded at P/E ratios in the 40s
in the year 2000, it was unlikely to do well for those who bought
back then. But over the last decade, Wal-Mart continued to grow
while its stock price declined. The P/E ratio of the stock
declined from the 40s to 13. For a company that grows its EPS
very predictably at 10%, it was cheap. The smart insiders started
to buy. Many of our gurus started to buy. Now Wal-Mart is at its
all-time high. Those buying the high quality company at fair
prices and patiently waiting are rewarded.
Over the long term, Mr. Market is quite fair, isn't he?
Related:
- Can Aggregated Insider Trading Activities Predict the
Market?
- Stocks that Both Gurus and Insiders are Buying
- Can Aggregated Insider Trading Activities Predict the
Market of Different Sectors?
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