Reading the Tea Leaves from Corporate Insiders' Trades

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When the stock market is hitting new highs and traditional valuation measures sit above their historical averages, investors seeking opportunities may feel stumped. That’s a good time to look at what the “smart money” is buying.

One group of smarties: corporate insiders — board members and executives, as well as shareholders who own more than 10% of the company, who likely know more about their business than anybody else. “Investors should pay attention to insider buying and selling because insiders have intimate knowledge of their company’s operations and an information advantage,” says Ben Silverman, director of research at Verity, an investment research and data services firm.

Of course, trading on information material to the business that hasn’t been made public is illegal. (Those kinds of trades caused trouble for Martha Stewart and Ivan Boesky.) And insiders who fail to report any purchase or sale of their company stock (including the number of shares and prices they paid) to the Securities and Exchange Commission within two business days are breaking the law, too.

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But not all insider trading is illegal, and Silverman says certain kinds of insider transactions have been good predictors of above-average returns in a stock. In other words, as part of a process to analyze a potential investment, it can pay to understand insider trading and how best to use the data to choose stocks.

To reduce the likelihood that insiders are acting on secret information, most companies allow their insiders to buy or sell stock only during certain periods (windows) per year. Those periods typically start a few days after a quarterly earnings report or other major announcement, and they end a week or two before the next expected announcement. Insiders can also set up an automatic plan for trades that, for example, might sell a preset number of shares or execute stock options on the same date each month — inside or outside of a company’s window.

All of these transactions are reported to the SEC and are publicly available. But “not all buys and sells send signals,” says Silverman. For example, he focuses on stand-alone insider transactions that aren’t part of a pattern, such as those that occur within the permissible trading windows but are not part of an automatic plan.

Why insider buying matters more

Insiders who open their wallets to buy shares of their company, outside of an automatic plan, “do that for only one reason: They think the stock is undervalued and they can make money,” says Adam Bergman, a co-manager of Davenport Insider Buying, a mutual fund that combines nitty-gritty research with data on insider activity to build a portfolio.

When the Davenport managers see big insider purchases for shares in companies that also meet their fundamental quality screens, they get ready to pounce. They try to pick shares up at prices within 5% of the price that the insider paid.

Insider selling can be less telling. For starters, companies now award so many stock options and grants as compensation that executives often exercise options and sell some shares just to stay diversified, says Davenport’s Bergman. Also, insiders might sell shares to pay for college or a vacation home. That said, Bergman views large insider selling — outside of an automatic plan — as a flag to reevaluate a holding.

There are other nuances to consider. Insider transactions at small companies are less meaningful, says Verity’s Silverman, in part because those stocks are more volatile than large-company stocks. And insider activity is a less reliable short-term signal in some sectors.

Energy and materials, for instance, are both cyclical and down markets can last years. “We have seen oil prices start to decline and executives start buying,” but it can take years for the cycle to turn, says Silverman.

Putting the info to work

It can take time to sift through SEC filings to find the few that reveal important information about a stock. But some free tools can make it easier for do-it-yourself investors.

At Fidelity, clients can screen for stocks with more insiders buying than selling, for example. The free version of FinViz.com can sift for stocks with “positive” insider sentiment if insider ownership has grown over the past six months.

And CapEdge.com shows the 10 biggest insider transactions over the past day, week, and month, and whether the trades were set up in an automatic plan or executed within the company’s insider-trading window.

Professional investors who have already crunched 2024 insider-trading data highlight three stocks that insiders are betting will rise in price in 2025:

Jefferies Financial Group (JEF, $64). In mid-September, Sumitomo Mitsui Financial Group increased its stake in the investment bank Jefferies Financial Group to 15%, from 10.9%, by snapping up 9.2 million shares at a price of $59.67 apiece. “That kind of big purchase is very rare. I believe they have insider information that we do not have,” says Minyi Chen, a portfolio strategist with AdvisorShares Insider Advantage, an exchange-traded fund that favors stocks in companies that are actively buying back shares or that show solid insider buying. He started picking up Jefferies stock on the news.

But Chen also likes Jefferies because it is beating larger investment banks at landing new deals. Plus, earnings are on track to nearly triple in 2024, compared with the year before, and jump 54% in 2025. As a long-term investor, Chen says he is patient and waits for opportunities to buy shares that are within about 5% of the price that the insider pays.

Marvell Technology (MRVL, $80). A handful of insiders have been plunking down money to buy shares in this chip and computer equipment firm in recent months. A board member bought nearly $100,000 in shares at $70.21 in June. And in mid October, Marvell chief executive Matthew Murphy bought 13,000 shares at $77.63 apiece. Those purchases, plus expectations for a return to profitability by the next quarter, earned Marvell a spot in the Davenport fund, says Bergman. CFRA Research’s Angelo Zino rates the stock a “strong buy,” in part because booming demand for the firm’s artificial intelligence products could drive future earnings growth.

Norfolk Southern (NSC, $250). The Davenport fund managers started buying stock in this freight railroad company in mid-2024 when they noticed several board members were picking up shares. Seeing several insiders buying at the same time is “a much stronger signal than just one insider purchasing,” says Davenport co-manager Kevin Bennett. The company’s competitive position — it is one of two major freight railroads serving the eastern U.S., which translates into pricing power — and prospects of better profit margins, thanks to pressure from an activist investor, also worked in the stock’s favor in the fund managers’ view.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Kim Clark is a veteran financial journalist who has worked at Fortune, U.S News & World Report and Money magazines. She was part of a team that won a Gerald Loeb award for coverage of elder finances, and she won the Education Writers Association's top magazine investigative prize for exposing insurance agents who used false claims about college financial aid to sell policies. As a Kiplinger Fellow at Ohio State University, she studied delivery of digital news and information. Most recently, she worked as a deputy director of the Education Writers Association, leading the training of higher education journalists around the country. She is also a prize-winning gardener, and in her spare time, picks up litter.