Peter Lynch, the former manager of the Magellan Fund at Fidelity Investments, once 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.” Of course, the well-known investment guru is not the only successful money manager who believes that insider buying activity should be interpreted as a bullish signal. A number of hedge fund vehicles incorporate insider trading metrics into their broader stock selection and analysis process.
Corporate insiders, namely board members and executives, know a lot more about their company’s business fundamentals and future prospects than anyone else, which is why investors would be wise to keep a close eye on how insiders are trading shares. These informed individuals are way ahead of analysts and portfolio managers, which is why their purchases tend to outperform broader market benchmarks on aggregate. Meanwhile, the investment community appears to be ignoring insider selling activity, as most insider trades are made through trading plans or after the exercising of stock options, which makes it more difficult to pinpoint the most useful trading activity (and there’s a lot of insider trading noise out there from certain other sites featured on Google Finance that shall remain nameless). That’s where we come in. Our daily insider trading articles feature only the most relevant insider trading activity that was not carried out through trading plans or after stock options were recently exercised. The following article will do just that, discussing the fresh insider trading activity at five companies.
Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).
Board Member of This U.S. Pharmaceutical Manufacturer Buys Some Shares
Eli Lilly and Co (NYSE:LLY) was one of the few companies that had insider buying activity this past week amid U.S. stock indexes hitting new all-time highs. Board member Jackson Peter Tai snapped up 2,560 shares on Friday at prices of $80.42-to-$80.43 per share, lifting his overall holding to 42,110 shares.
The U.S. pharmaceutical manufacturer recently said that its investigational cancer-fighting drug, called abemaciclib, failed to meet efficacy criteria in an interim analysis of a Phase 3 trial for the treatment of breast cancer. Even so, the independent panel that conducted the interim analysis recommended Eli Lilly and Co (NYSE:LLY) to continue the trial, which is designed to evaluate the safety and efficacy of abemaciclib in combination with the anti-estrogen drug fulvestrant, in patients suffering with a form of advanced breast cancer. Eli Lilly shares are 5% in the red thus far in 2016. Andreas Halvorsen’s Viking Global trimmed its position in Eli Lilly and Co (NYSE:LLY) by 21% during the June quarter to 9.38 million shares.
The next page of this article will discuss the insider buying activity at another biotech as well as at a BDC.