Profit From the Insiders' Data
Jonathan Moreland
06/04/08 - 12:59 PM EDT
Every day, U.S equity investors can invest in more than 8,000 stocks. Such a huge opportunity, though, is also hugely confusing. How do you start narrowing down your investment choices?
Value investors may start by looking for stocks with low price-to-earnings or price-to-book-value ratios. Growth investors likely screen quarterly financial results looking for stocks with great year-over-year earnings comparisons. Momentum investors probably prefer to look at the "percentage gainers" list and stocks with large trading volume increases. But all of these investors could increase their returns if they started their stock-picking by looking at the same information flow: insider trading data.
The legal insider data reported on the
SEC's Form 4, as well as SEC documents recording transactions by institutions, are a great source of investment ideas no matter what style you prefer and no matter what type of market we're in. It's also invaluable for following stocks you already own. After all, who's in a better position to know a company's prospects than its own management?
In a victory for common sense, academic studies show that this SEC data is useful for garnering "excess returns" in stocks. A more important testimony comes from institutional investors, many of whom have successfully used the SEC's insider data to help make their investment decisions for years.
In fact, professional investors have enjoyed timely access to the SEC's insider trading data for decades, finding it lucrative to pay what it takes to access the most up-to-date detailed electronic databases. Starting in the early days of computers, institutional investors paid private firms to manually key in Form 4 and other insider trading data from the original paper forms filed with the SEC. By the time individual investors got the affordable public versions of the data from the SEC itself or free Web sites, institutions had already traded on the information. Perversely, the data that were meant to level the playing field for individual investors was giving institutional investors yet another leg up. That situation lasted well into the 1990s.
But the Internet, the SEC's "Edgar" system for filing various financial forms electronically and the passage of Section 403 of The Sarbanes-Oxley Act back on July 30, 2002, have finally made those data available to anyone. It's still worth paying a bit of money to a service to get the raw insider data organized well to save you time, but the cost has come way down. This data flow was already profitable to follow with the old 10- to 40-day time lag, but with the filing deadline for Form 4s now just two days, it's even more so.
But using the data is much more involved than just blindly mimicking the trades of a company's chairman. Some insider signals and patterns are important, while others are just time-wasting noise. It takes time and experience to analyze the streaming mass of insider data and make money with it.
That's why I've teamed up with
TheStreet.com to provide a weekly newsletter that cuts through the noise and puts this important data stream to work for you. It's called
TheStreet.com InsiderInsights!
Every issue of the newsletter identifies the most important insider trades from the past week and serves them up in numerous, easily digestible tables. Basically, I slice and dice the data and personally review the insider profiles of hundreds of companies a month to generate actionable investment information for you.
Every month, I also address the needs of investors with more specific needs. My Special Screens combine insider data with various fundamental and price-action criteria to find the most promising insider-approved income, momentum, growth, and value investments -- as well as stocks to avoid or sell short.
Into penny stocks? These names are underrepresented in many data flows, like purely fundamental screening tools. But insiders at exchange-traded companies of any size are required to file Form 4s. And the investment intelligence they relay is often the only unbiased information you'll find for small- and micro-caps shunned by the analyst crowd.
But my value-added insider tables and screens are just the start, because I don't just generate this information for you -- I also use it in my own investment process. So every week, I also list the companies I found in my insider info stream that look promising enough for me to research further, on both the long and short side. I also have an ongoing Recommended List of insider-inspired positions that I update right up until I recommend selling them.
Other services generate insider lists based on some scoring mechanism. But insider data is qualitative by nature, and automated grading paradigms often miss nuances in the patterns of trades produced by individuals and clusters of insiders. There is really no substitute for digging into the data to determine the significance of transactions. That's what I love, and that's what I do -- so you don't have to.
So come inside, and be a fly on the wall of every executive suite and boardroom in America. You may not know what these insiders know when they trade, but you can certainly know what they
do. And this information is arguably just as good.
Whether you use the newsletter's tables as a first screen to jump-start your own investment process, or whether you choose to jump on board my personal favorites,
TheStreet.com InsiderInsights is there for you.
This article was written by Jonathan Moreland, whose newsletter, "TheStreet.com InsiderInsights," parses mounds of data on insider trades to find investable ideas.
