INVESTING STYLE
Overview
We believe investors will get the most out of insider reports when the information is applied within the context of their own defined investment philosophy and process. With this in mind, we look at insider reports in relation to three broad types of investment styles:
  1. Contrarian, which is characterized as buying out-of-favour stocks offering value or "buying losers"; and selling over-bought stocks appearing over-valued or "selling winners" (contrarians usually have longer investment horizons than momentum investors).
  2. Momentum, also sometimes referred to as growth, which is characterized as following short-term price or earnings trends, or "buying winners" and "selling losers."
  3. Sector rotation, which refers to favouring stocks within the most attractive industries given forecasts for the economy.
Investment Style Philosophy
Using insider reports will in many ways depend on what investment style you use.
  • Contrarian investors will be most interested in identifying insider buying (selling) in stocks that have sharply underperformed (outperformed) the market.
  • Momentum investors will want to pay close attention to insider buying (selling) in stocks with recent relative strength (weakness) versus the market.
  • Sector rotators will generally be interested in identifying sectors with high or low levels of insider buying compared to selling. Sector investors may often apply contrarian or momentum strategies within the invested sectors.
Tools
Morning INK
The Morning INK report focuses on helping momentum investors by striving to identify stocks which are outperforming (underperforming) the market over the short term and which also have seen insider buying (selling) as reported in yesterday's filings. Sometimes, the report will also highlight contrarian opportunities that catch our eye.

Market INK
The Market INK report provides both contrarian and momentum investors with a list of companies that have seen the most insider buying or selling over a range of time frames and sectors.

The report's INK sector indicators provide sector rotators with a sense of which industries have potentially bullish, bearish or neutral insider sentiment.

Company Overviews
The Company Overview charts provide an indication of the type of insider trading (CEO, officer, or director) taking place in the company and a snap shot of absolute price trends to help both contrarian and momentum investors put insider filings in perspective.

Holdings Summary
The Holdings Summary provides a snapshot of how the direct-holdings have changed for key insider types (CEO, officer, or director) along with current holdings.

Search and Research
All types of investors can search for companies with the most insider activity based on a range of criteria.



Contrarian
Contrarian Insider Buying
When insiders buy a stock underperforming the market
When an insider voluntarily increases exposure to the company by buying stock in the open market, it goes against the principles of diversification. Therefore, we believe insider buying may signal the stock is undervalued, particularly if it has been underperforming the market.
  • According to Jonathan Moreland, insider buying is usually early.
  • Our preliminary data has found that most early Canadian insider trades have been done by contrarians.
  • We also found that the average stock turned up sooner following large contrarian insider buying (momentum traders take note!) but on average we would expect contrarian type trades to take anywhere from 1 to 3 years to before outperforming the market (see Seyhun).
Also, there are reasons unrelated to the valuation of the company that could motivate an insider purchase. A number of companies, for example, require top management to own shares. In many cases they are encouraged to apply part of their compensation package towards stock purchases. While this should better align shareholder and management interests, it is not quite the same as an insider buying shares voluntarily based on perceived undervaluation of the stock in the market.

Sometimes, especially in smaller companies, the insider may be trying to support the stock price or provide liquidity. Perhaps that is one reason why there is more insider buying than selling in the smallest of companies.

Contrarian Insider Selling
When insiders sell a stock outperforming the market
Most large companies will experience net insider sales because insiders need to diversify. Therefore, we believe all insider sales need careful inspection. To complicate matters, recent research has suggested that small selling is positive.
  • On average, general contrarian selling is not usually followed by short-term underperformance (see Seyhun, 1998).
  • Over the short term, small selling may be positive (see Scott and Xu, 2004).
  • Over the long term, large contrarian selling may on average foreshadow a dip in the stock's price relative to the market, particularly if selling involves the CEO (see Seyhun, 1998).
Profit taking by insiders through the exercise of options and subsequent sale of stock following a period of outperformance is not unusual in large cap stocks. In contrast, a large amount of selling (including option-related selling) that is taking place during a "liquidity" event (much higher than average volume) during a price breakout may suggest that investors need to take a look at the firm's fundamentals to assess whether or not the price rise is sustainable.

In addition, recent research (Scott and Xu, 2004) has suggested that small selling is positive as it may only reflect "forced" sales due to personal financial circumstances, and not company fundamentals.
Momentum
Momentum Insider Buying
When insiders buy a stock outperforming the market
Momentum-type insider buying (stocks outperforming the market over the short term, such as 3 months) is unusual as most insider trades are contrarian in nature. Seyhun found that stocks with momentum-type insider buying continued outperforming the market on average for the next 3-12 months.

Like the case of contrarian insider buying, there are reasons unrelated to the valuation or growth of the company that could motivate an insider momentum purchase. As with any type of insider transaction, compensation-related factors or behavioural issues (see the General Factors tab) should always be considered.

Momentum Insider Selling
When insiders sell a stock underperforming the market
Seyhun found that stocks underperforming the market accompanied by insider selling on average subsequently underperformed the market more than other downward momentum stocks.
  • On average, stocks with momentum insider selling have been likely to underperform the market for the next 3-12 months (see Seyhun).
  • Our work suggests that large sells have provided a stronger negative picture than small selling (see also Scott and Xu).
In general, we like to see insider buying when a stock is falling. Consequently, large insider selling during periods of relative stock price weakness may signal a warning sign.
Sector
Insiders Buying (Selling) within a Sector
When insiders across different companies in the same industry increase their purchases (sales)
Seyhun suggests that aggregating insider purchases within industry groups may help assess the outlook for that industry. An important caveat relates to whether or not stocks within the industry are negatively correlated. If they are, then looking at sector level buying may not be helpful. An example might be the grocery business, where the gains of one retailer may be at the expense of another.
  • Insiders across companies in the same industry which are all buying (selling) , may signal improving (deteriorating) opportunities for stocks in the sector (see Seyhun).
Even if stocks are negatively correlated within the industry, unanimity in terms of buying or selling among companies may be signaling something. In terms of the grocery business, industry wide selling among Canadian firms might be hypothetically signaling the arrival of new competition or sector-wide margin issues.
General Factors (not related to investment style)
Identity
We believe a CEO tends to know more about the overall health of the firm than an officer from a particular division. Insiders with active duties in a firm may have more day-to-day insight than outside directors.
  • Usually, the closer the insider is to the top, the more interesting and informative the trade (see Seyhun, 1998).
  • Meanwhile, institutional security holders (with greater than 10% stakes) probably do not follow the company on a daily basis and must subject their investment decisions to client needs. So their trades so are the least interesting and we tend to exclude them from most of our screening analysis (although all their filings can be found through the advanced search screen and are listed in each company's latest filings and detailed filings sections).
Consensus and Size
Seyhun has suggested that when insiders at a company buy or sell in unison, such situations are probably more important than a single insider acting alone.
  • Filing reports should carry more weight if there is more than one insider undertaking the same trade (see Seyhun, 1998).
  • Small sales may not be negative (Scott and Xu, 2004).
Also, in terms of size of transactions, Beneish and Vargus have suggested that large buying or selling may help to indicate whether income-increasing accounting accruals will persist or not.

Moreover, any type of compensation-related consensus selling would not be the same as seeing a large number of insiders all of a sudden selling their existing common share holdings (not related to recent or immediate option exercise) on the public market.

Behavioural Mistakes
Insiders can be wrong
Insiders are not immune from the behavioural mistakes that happen among investors such as wishful thinking. That is why we do not recommend simply buying or selling a stock based on the actions of insiders alone and we advise you not to trade based on information gained solely from the services that we provide.