It doesn't take a domestic diva like Martha Stewart to clean up a portfolio that's infested with stocks of self-dealing CEOs. If you want to know who's the next Sam Waksal — Martha's pal and former Imclone Systems CEO accused of selling ahead of bad news from the FDA — you can do it online. A variety of sites track SEC filings, which can tell you when execs are cashing out. Most of the time, insiders sell for legitimate reasons, but sometimes a pattern of insider selling is an indication of trouble ahead (see Heavy Insider Selling Could Spell Trouble, May 2002). And, according to several online services, you can use insider transaction trends — remember, buying by company execs is a good thing — to get better than average returns. At least, that's what the sites claim.
To get an idea of how tracking insider dealings can make you a better stock picker, take a look at Jonathan Moreland's InsiderInsights. Since its inception, InsiderInsights says its recommended list of stocks is up 67 percent. Only 5 percent of that growth was earned since the beginning of the year, but compared to the drubbing the S&P 500 got over the same period, Moreland's morsels don't look half bad. Even his short-term trades gained about 13 percent. As an added bonus, Moreland is refreshingly forthright. In his July issues, he was admirably open about wrong calls he had made and even supplemented regular issues with e-mail bulletins when a few of his positions were stopped out. A week's free trial is available.
Thomson Financial Network
While the insider trading section of the Thomson Financial Network is not as complete as the weekly services, it's still worth a visit for its timeliness, and price (free). Perhaps the most interesting feature is “Today's Top 5,” a series of lists that includes the day's purchases and sales based on the insider's prior record for timely calls. Another section on unusual insider activity, which includes a list of first-time insider purchases or sales by executives in the past six months, might also turn up some interesting ideas.
Estimating the Returns to Insider Trading
Does this work any better than counting sunspots? After studying all insider trading of public companies between 1976 and 1999, professors at the University of Pennsylvania's Wharton School of Finance concluded that if you treated insiders' purchases as a single portfolio, insiders' buys collectively outperformed the market in the first six months after purchase by a little more than 10 percent. The study is pretty heavy going, but a quick skim should give you an interesting factoid or two to share with your clients. For instance, being in the corner office doesn't necessarily give you the best view. The professors found that historically, top executives don't earn better percentage gains on their purchases than other officers and directors.