When insiders buy stocks, should investors join them?


Friday, January 12, 2018

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According to investing strategy, if executives, directors or others with inside knowledge of a public company are buying or selling shares, investors should consider doing the same thing.

Considered a long-term strategy of picking up stocks based on the actions of key executives and directors, people sometimes wait years before their actions bear profits. However, it is a strategy for investors who need guidance beyond relying on their financial advisor to pick stocks.

According to recent activity on the Jamaica Stock Exchange, outside investors may consider a “follow back a me” approach to picking up stocks that directors and connected parties are also buying. Now, sometimes the number of shares is not overwhelmingly large. However, there are investors who believe that if it is good enough for a director, it is good enough for them.

Here are recent activities to consider:

* PanJam Investment Limited (PJAM) has advised that a Director purchased 266 PJAM shares on December 29, 2017.

* Salada Foods Jamaica Limited (SALF) has advised that a connected party purchased 4,000 SALF shares on December 21, 2017.

* Caribbean Producers Jamaica Limited (CPJ) has advised that a connected party purchased a total of 338,049 CPJ shares on December 28, 2017.

* Jamaican Teas Limited (JAMT) has advised that a connected party purchased 75,000 JAMT shares on January 3, 2018.

* Lasco Financial Services Limited (LASF) has advised that a connected party purchased a total of 432,955 LASF shares on December 29, 2017.

Investment analyst John Jackson notes: “Trades done by parties connected with companies may carry coded messages as to likely future performance of the companies. Not all trades may have much meaning but some could indicate increased profits or a company they may consider undervalued in the case of buying and in the case of sales, it could be that profit going forward may be disappointing and may suggest the company may be overvalued by the market. In the past some of the traders in the local market have not sent any known information when viewed against developments in the companies subsequent to the trades by insiders. In the case of a few of the listed companies investors are well advised to pay attention.”

University of Michigan finance professor Nejat Seyhun, author of Investment Intelligence from Insider Trading (2000), notes that stock prices rise more after insiders' net purchases than after net sales. On the whole, insiders do earn profits from their legal trading activities, and their returns are greater than those of the overall market.

So if you want to follow this strategy, here are a few more pointers.

1. Some insiders are better than others.

2. Directors know less about a company's outlook than executives. Key executives are the CEO and CFO. People running the company know the most about where it is heading.

3. A lot of trading is better than a little.

4. One or two insiders at a big corporation do not make a trend. Three or more provide a better indication that something is happening. Generally speaking, solitary trades are unreliable.

5. People at small companies know more.

6. At small and mid-sized companies, virtually all insiders are privy to company financials. At big corporations, information is more dispersed and typically only the core management team has the big picture.

7. Stay the course.

Evidence suggests that insiders tend to act far in advance of expected news. They do this in part to avoid the appearance of illegal insider trading. A study by academics at Pennsylvania State and Michigan State contends that insider activity precedes specific company news by as long as two years before the disclosure of the news.




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