Keeping Score on Insiders' Trading Success

When you think about it, insider trading should be the king of stock indicators. Who knows more about a company's real situation after all than its managers, directors and biggest investors? If what they're seeing leads them to buy or sell, that should pretty much be the final word, right?

And yet -- admit it -- you pay little, if any, attention to what the insiders are up to at your favorite companies.

Same here, mostly because this stuff is hard to interpret. How much insider buying does it take to produce a buy signal, for instance? Does it matter if it's just one person, or do you need the whole management team to make it real? How many insiders have to sell before normal profit taking becomes rats jumping ship? And what about all those cases of insiders and/or companies buying stock, only to have the stock tank? Despite being close to the action, these guys seem to be wrong almost as often as the rest of us.

Which is why a new service called insiderscores.com is so interesting. Founded by Craig Columbus, former head of the insider trading division of financial data provider Primark (PMK Quote), this site slices and dices insider transactions in a (generally successful) attempt to pull meaningful signals from the background noise. (Primark is among the backers of insiderscores.com.)

The most interesting of its findings is that of the 150,000 or so insiders filing reports of their trading activity with the Securities and Exchange Commission, only around 14,000 are consistently right. When one of these "all-stars" buys his or her company's stock, it rises by an average of 31% in the next six months. When one of them sells, it falls by an average of 26%.

Alpha Technologies Group (ATGI Quote) exec Butler Marshall, for example, has a perfect score (100 on a scale of 0-100) on the buy side . Following 18 purchases over the past seven years, the company's stock rose an average of 43%. Robert Conway of Astoria Financial (ASFC Quote) has sold five times in the past year, and the average decline six months later has been 22%. His latest sale in July was also one of his biggest, implying that the tough times aren't over.

Trustmark's (TRMK Quote) John Black, meanwhile, is predictive on both the buy and sell sides with an average six-month return on 15% of his past 18 buys, and an average 7% decline after his six sales. So holders of that stock might be interested to know that in the past month he's dumped more than 26,000 more shares.

I spent a couple of hours rooting around this site on Tuesday, and found the following:

Williams-Sonoma (WSM Quote) -- based on its recent past -- trades in a seasonal pattern of weakness early in the year and strength later on. In July 1999, one of its directors, John Bronson, bought a big block of stock at around 28, after which it nearly doubled. By last month, the stock was back down into the high 20s, and Bronson was buying again, indicating that he expects another strong second half.

Applied Analytical Industries (AAII Quote), a product development and support services provider for pharmaceutical companies, recently reported earnings that beat analysts' expectations. But one of its all-star insiders, William Underwood, has been a seller. "Not only was this the first insider sell at AAII since December 1998," writes Carr Bettis, developer of the site's search engine and a regular columnist, "but Mr. Underwood has also filed a Form 144, which indicates that he intends to sell an additional 3,500 shares within the next 90 days." In the six months following Underwood's four previous sales, the company's stock price has fallen an average of 38%.

BancWest (BWE Quote) has three all-star insiders with a combined average six-month return of better than 20% on their past buys. And all three are buying now.

Meanwhile, if you add up the all-star activity, you get sector- and market-timing calls. Year to date, for instance, finance and utility company insiders have bought about twice as much as they've sold, while for tech companies the ratio has been reversed.

For the market as a whole, all-star sellers outnumber buyers only slightly, which is good news, says Columbus. "Selling generally exceeds buying by 3-to-1, so for it to be in balance is moderately bullish." It's not, however, a screaming buy like fall 1998, when "There was much more insider buying [especially of tech stocks], calling a definitive bottom."

For TSC readers with Asian brokerage accounts, there's another version of this site, asiascores.com, that mines Hong Kong and Singapore insider trading data. Since insiders in those countries have to report their trades more quickly than do U.S. insiders, this data site might be even more useful.