April 20, 2020

Insider Sentiment May Signal Company Direction

by Tajinder Dhillon.

Companies within the S&P 500 have reduced the amount of guidance provided to the market as they try to assess the impact of COVID-19. This has created a more challenging environment for investors seeking to assess a company’s prospects. To help with this uncertainty, we can look at how insiders have bought and sold shares of their own companies as one indicator of sentiment.

Corporate insiders include officers and directors in addition to shareholders who hold more than 10% of the outstanding shares. Executives may inherit or sell shares for various reasons (i.e. stock option, tax-related, income purposes), so we instead focus on purchasing activity done by insiders on the open market. If a company sees net buying activity (i.e. open market purchases > open market sells), this can be viewed that sentiment amongst insiders is positive.

During February and March, the S&P 500 saw 4,508 open market transactions which resulted in a net selling of 24.9 million shares for a transaction value of -$7.6 billion. For reference, insiders who are classified as a “beneficial owner of more than 10% Class” are included in the aggregate results.

February saw net selling of 31.4 million shares for a transaction value of -$7.3 billion, which included significant activity from Amazon. A more positive picture was painted in March, which saw net purchasing of 6.5 million shares for a transaction value of -$310 million. For March, this meant that the transaction value of sells outweighed purchases, but buying breadth was observed when looking at net shares traded. As a reminder, the S&P 500 began its descent in February with the sell-off peaking in late March, which could help explain the rationale behind insider activity as they try to time the market (more on this later).

In March, sectors that saw net purchasing activity by insiders included Consumer Discretionary, Energy, Industrials and Materials. The companies who saw the largest net purchasing activity in March by transaction value included International Flavors & Fragrances Inc ($228.4m), TransDigm Group ($225.4m), Newell Brands ($46.5m), Alexion Pharmaceuticals ($39.5m), Coty Inc ($37.4m), Mohawk Industries ($25.6m), and MGM Grand ($22.4m).

The Energy sector is noteworthy, as every company in the sector (except for two) saw net purchasing activity in March. Kinder Morgan ($13.6m), ONEOK Inc ($3.4m), Exxon Mobil ($2.5m) and Valero Energy ($2.2m) had the largest insider purchasing by transaction value. This may be a sign that oil executives believe the sell-off to their companies due to COVID-19 and the collapse in oil prices may be overdone.

StarMine Insider Filings Model (U.S. only)

Portfolio managers and analysts can look to the StarMine Insider Filings Model to gauge insider sentiment at a company level. The model ranks companies inside the U.S. on a percentile basis from 1-100 (100 being bullish) to reflect the sentiment of company insiders on the prospects of their company, as gleaned from the publicly available record of their trades and holdings.

The StarMine Insider Filings Model weights transactions in order to capture insider sentiment and de-emphasize those trades that likely represent diversification or compensation. To find this model, click on the “Insider Report” page under Ownership when looking at a company.

Alexion Pharmaceuticals (ALXN.O) is a good example, as seen in exhibit 1. ALXN.O has a model score of 84 in North America, in addition to a score of 81 within Healthcare which reflects positive insider sentiment. The model has two components which include how many insiders are buying or selling company securities (referred to as net buyer ratio) and how much is being bought or sold by insiders (referred to as buying and selling depth).

Exhibit 1: StarMine Insider Filings Model for ALXN.O
Source: Refinitiv Eikon

We can look at Exhibit 2 to drill down into net buyer ratio and buying depth for ALXN.O. To the left of the image, we can see that on an adjusted basis, there are 19 insiders classified as buyers over a trailing 24-month period. To the right of the image, we see a buying depth score of 99 which shows active purchases (defined as open market purchases) made by insiders. The model excludes open market purchases made by insiders who hold more than 10%.

Exhibit 2: StarMine Insider Filing Model for ALXN.O

Source: Refinitiv Eikon

The model allows users to drill down into transaction-level data. From here we observe that insiders purchased shares between March 16 and 18 at transaction prices ranging between $75-$83 per share. Alexion Pharmaceutical’s stock price on April 7 was $98.56. In this example, insiders were able to time the market very well and snap up shares at a discount and benefit from the market recovery.

Exhibit 3 shows users the model score alongside the stock price of a company. We can see the model score spiked at the time when insiders purchased the company.

Exhibit 3: StarMine Insider Filing Model for ALXN.O

Source: Refinitiv Eikon

Screen for candidates based on insider sentiment

The screener app in Refinitiv Eikon allows users to screen for companies with weak or strong insider sentiment. Exhibit 4 starts with the S&P 500 as our universe and we can add a filter for companies with a StarMine Insider Filings Model score greater than or equal to 70.

Companies with strong insider sentiment include Kraft Heinz, FedEx, Occidental Petroleum and AT&T. We can also customize the table to add additional columns from the data library and have added the net buyer ratio component along with the buying depth and selling depth scores for additional insight. A selling depth score of 100 indicates minimal active selling done by insiders which can be viewed as a positive indicator. Using Kraft Heinz as an example, active purchases by insiders over the last year totaled $107 million. During this same time period, there were zero active sells done by insiders, resulting in a selling depth score of 100.

 Exhibit 4: S&P 500 Constituents with StarMine Insider Filings Model score => 70

Source: Refinitiv Eikon

With more volatile times ahead and a lack of company guidance being provided to investors, looking at insider transactions could provide one signal to gauge company sentiment.

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