Insider Trading
Are insider deals a good indicator of future share price of a company?
Are insider deals a good indicator of future share price of a company? (Part 1)
This week we take a look at whether inside transactions from insiders such as CEOs, CFOs and directors can show future share prices. What should we be investigating when looking at insider buying:
1. Magnitude of Purchase
2. Timing
3. Consistency
4. Position of the Insider
5. Past Performance
6. Market Conditions
7. Ownership Alignment
8. Regulatory Filings
Lets look at some examples:
1) Timing, Timing & timing.
In many examples its always important to look at when insiders are buying as this can indicate is senor figures are only buying to increase confidence in the share price rather then it being seen as cheap,
Multiple insiders buying can be seen as positive but there have been instances of CEO & CFOs buying to increase confidence. In order to help combat this, it’s worth having a look at the company financial calendar and when they are reporting. Let’s take a look at Tesco’s:
In September 2014, Tesco, one of the largest retailers in the UK, faced a crisis when it revealed a significant overstatement of its profits. This revelation came as a shock to investors and the market, leading to a sharp decline in Tesco's share price. The company disclosed that it had overstated its profits by £263 million due to accounting irregularities.
In an attempt to restore confidence in the company, Tesco's newly appointed CEO, Dave Lewis, took action by purchasing £159,000 worth of shares in the company. Lewis' purchase was seen as a vote of confidence in Tesco's future prospects, intended to reassure investors and stabilize the share price.
However, despite Lewis' purchase, Tesco's share price continued to decline as the scale of the accounting scandal became clearer and investor confidence eroded further. The company faced investigations by regulatory authorities, including the UK's Serious Fraud Office, and underwent significant management changes.
The fallout from the accounting scandal led to a period of turmoil for Tesco, with the company reporting its largest annual loss in its history in April 2015, amounting to £6.4 billion. The company also faced challenges from competitors in the fiercely competitive retail market.
Ultimately, the scandal had a profound impact on Tesco's reputation, financial performance, and share price. While Lewis' purchase of shares may have briefly reassured some investors, it was unable to prevent the continued decline in Tesco's share price amidst the fallout from the accounting irregularities.
2) Magnitude of Purchase
The size of the insider's purchase relative to their usual trading activity can be significant. A large purchase compared to historical transactions might indicate a stronger signal of confidence.
In December 2018, Persimmon plc, led by CEO Jeff Fairburn, found itself embroiled in controversy surrounding executive pay. Amidst public scrutiny and criticism over the size of executive bonuses, including a contentious long-term incentive plan, Fairburn made a significant purchase of Persimmon shares. Despite ongoing debates about executive compensation practices within the company, Fairburn's decision to buy shares signaled a resolute vote of confidence in Persimmon's future prospects.
The magnitude of Fairburn's purchase, particularly when compared to his usual trading activity, drew attention from investors and market observers alike. It was seen as a bold statement, suggesting that Fairburn believed strongly in the company's underlying business fundamentals and its potential for long-term growth. Amidst the turbulence surrounding executive pay, Fairburn's insider buy served as a reassuring signal to investors about Persimmon's stability and the leadership's commitment to navigating through the challenges.
While the controversy over executive compensation eventually prompted changes in Persimmon's management structure, Fairburn's insider purchase in December 2018 stands as a notable example of how insider buying can provide valuable insight into a company's prospects and management confidence, even during times of external scrutiny and uncertainty.
During the height of the financial crisis in 2008, Royal Bank of Scotland (RBS) faced unprecedented challenges due to its exposure to risky assets and subprime mortgages. As RBS's share price plummeted and the bank teetered on the brink of collapse, insider buying emerged as a notable phenomenon. Sir Fred Goodwin, then-CEO of RBS, notably purchased shares in October 2008. However, despite this insider activity, RBS's share price continued to spiral downward amidst widespread market panic and concerns about the bank's financial stability.
The financial crisis created an environment of extreme uncertainty and fear in the financial markets, with investor confidence reaching historic lows. In such a tumultuous market landscape, the impact of insider buying at RBS was eclipsed by broader economic factors and systemic risks facing the banking sector. Despite the significance of insider transactions as indicators of management confidence, their influence was limited in the face of the monumental challenges posed by the financial crisis.
The example of RBS during the financial crisis underscores how market conditions can profoundly overshadow insider buying. During times of crisis and market upheaval, factors such as systemic risks, investor sentiment, and overall economic conditions often take precedence over insider transactions, dampening their impact on a company's share price.
3) Regulatory Filing
Monitor insider trading disclosures filed with regulatory authorities for transparency and compliance. These filings provide details of insider transactions, including the names of insiders, transaction dates, and the number of shares bought or sold.
Ocado Group plc 2020 example , a leading online grocery retailer.
In 2020, Ocado's CEO, Tim Steiner, made a notable purchase of company shares, which was disclosed in regulatory filings. Steiner's purchase came shortly before Ocado announced a major partnership agreement with a global retail giant, significantly boosting investor confidence in the company's growth prospects.
The transparency provided by regulatory filings allowed investors to observe Steiner's insider activity and assess its timing relative to significant company announcements. Steiner's purchase signaled confidence in Ocado's future performance, reinforcing positive sentiment among investors.
This example illustrates how monitoring regulatory filings for insider trading disclosures can offer valuable insights for investors, enabling them to evaluate the actions of company insiders and their potential implications for stock performance and company prospects.
4) Consistency
Consistent insider buying over time can signal sustained confidence in the company's prospects. Conversely, sporadic or isolated purchases may be less reliable as indicators.demonstrating the principle of consistency in insider buying signaling sustained confidence is that of Burberry Group plc, a renowned luxury fashion brand.
In 2018, Burberry's CEO at the time, Marco Gobbetti, consistently purchased shares in the company over several months. These insider purchases were disclosed in regulatory filings, showcasing a prolonged pattern of confidence in Burberry's outlook.
Investors interpreted Gobbetti's consistent insider buying as a strong indicator of his belief in Burberry's long-term growth prospects and strategic direction. The CEO's confidence was particularly reassuring during a period of transition for the company as it underwent a strategic repositioning under his leadership.
Gobbetti's sustained insider buying instilled confidence among shareholders and contributed to positive sentiment surrounding Burberry's stock. The consistent pattern of insider purchases over time underscored the CEO's commitment to the company's success, reinforcing investor trust in Burberry's future performance.
It’s always interesting looking at insider buys and the reason. I’m sure you can see some patterns with insider buying and the share price going up. But also examples of the opposite. Therefore, understanding or trying to understand why the insider has bought is so important.
Thanks for reading, and do let me know what you think !
Ollz