The majority of investors this past August were certain the economy was going to plunge into another recession. Best Buy shares specifically were hammered, trading around $32. Three BBY insiders weren’t having any of this. The first insider made his purchase at $32.76 on August 19th. Another insider bought at $31.89 at the beginning of September. The third insider pulled the trigger at the end of September at $39.76.
Academic studies have shown that stocks intensively bought by insiders beat the market by more than 7% per year. Insider Monkey, your source for free insider trading data, defines “intensive trading” as three insider purchases within three months. As a result, our criterion sent a “buy” signal at the end of September. Today Best Buy shares trade at $44.81, with the two month return at 12.7%. The S&P 500 index returned 5.2% including dividends in that time. Best Buy beat the S&P 500 by 7.5% in two months, so in this case one need not have waited a year for the excess returns.
There are no guarantees that every intensively bought stock will outperform the market. Historically however, they returned more than the market on the average. This is mainly because either insiders utilize some material nonpublic information in their decisions (this is illegal but it’s very difficult to prosecute) or they’re simply better analysts than are the 20-something MBA graduates covering these companies in their ivory towers on Wall Street. Insider signals generated this way lead to higher returns than analysts’ buy and sell recommendations.
The first insider who bought BBY shares on August 19th returned 37% in about three months. He did this by trading a large cap company that had a lot of analyst coverage. The conventional wisdom that well covered large caps being efficiently priced proved to be meaningless here.