Insider Buys vs Share Buybacks
Stock Screen Strategy and Backtest Series
- NCAV and NNWC Screen Strategy
- CROIC and ROIC Screen Strategy
- Negative Enterprise Value Screen Strategy
- Free Cash Flow Cows
- Insider Buys and Share Buybacks
Insider Selling
Insiders know the company best and many people refer to the insider transactions to see whether management has been buying or selling.
When you sell shares, your reason could be a combination of any of the following:
- The share price is too high compared to the fundamentals
- You need to make a big payment for something
- You need the money for an emergency
- A better opportunity has appeared
- To receive a tax break
Besides the first point, the reasons for selling are not related to the stock itself.
Insiders are people too, and just like us, there are times where they have to sell their stocks for personal reasons.
If an insider is dumping shares, that is a different story and you have to know why, but aside from that, I have found that it is ok to give them the benefit of the doubt.
Insider Buying
On the other hand, compare the above list to the following reason for why you would buy shares of a company.
- You believe it is a good price and you can profit.
There are many reasons to sell, but only one for buying. Because it is cheap.
Insider Transaction Strategy and Back Test
Heavy insider buying is also the trait of a very cheap stock, which is a major theme of this value investing blog. Heavy insider buying also means that the company has run into trouble for the stock to be priced so attractively that insiders are willing to use their own cash rather than just vest with options.
Share buybacks is similar to the idea of insider buying, except, the company will authorize the repurchase of shares.
Share buybacks have the advantage of reducing the number of shares outstanding, which will increase EPS. Companies can then report higher EPS in later periods even though nothing has changed. Since Wall Street glorifies EPS, this should serve to increase the stock price.
Share repurchase plans also gives the view to the general public that management considers their company stock to be cheap enough to buy. This isn’t always the case, but the perception is true.
Another view is that the company is buying back shares because they have ample cash lying around. Repurchase programs are also announced publicly which provides greater exposure.
While insider buying leans towards cheap stocks, companies that announce share buybacks are well capitalized with operations are running smoothly. Both types of buying are shareholder friendly management, but which one will perform better?
Insider Buying Screen Criteria
- No financial stocks
- No ADR’s
- Average volume greater than 20k
- Insider buying transactions is greater than or equal to 10
- Insider selling transaction is less than or equal to 1
- Tried to eliminate bankrupt stocks by limiting price to be greater than $0.10
With at least 10 insider buys compared to 1 sell, I consider this is to be at the upper envelope where stocks will be extremely cheap. Extreme cheapness also equates to volatility which you may not be comfortable with, but consider this to be a starting source of ideas.
- No financial stocks
- No ADR’s
- Average volume greater than 20k
- Tried to eliminate bankrupt stocks by limiting price to be greater than $0.10
- Current shares outstanding is less than the prior TTM shares outstanding.
Due to the timing of this writing and the difficulty in obtaining and sorting through the data, I’ve applied the yearly dates to start from April.
2001 will be April 2001 to April 2002 etc.
Like I said, huge volatility. Even I won’t be able to handle the 70% drop. But that 465% gain in 2009 is monstrous. Refer to the graphs below to put the numbers into perspective.
Thoughts
I expected both screens to be volatile, but not this much.
I had also expected the insider buying screen to perform the best overall, but it looks like buying back shares performs much better.
Another interesting point is that of all the screens that I’ve gone through, it seems like the down years are are sickening harsh. This is something I’ll have to think about and consider how losses could be limited.
Readers have informed me that incorporating moving averages into the screens should help to limit the downside. I’ll look into it and see whether that holds true or not.
From the list of stocks,
- HAST [[HAST]]
- JBSS [[JBSS]]
- HSKA [[HSKA]]
- DITC [[DITC]]
- RAS [[RAS]]
have also come up in different value stock screens that I offer.
For more stock ideas, visit the share buyback screen and the insider buys screen.
Disclosure
None at the time of writing.
