Insider Shading: This is how pro investors know when a stock is about to plummet
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Retail investors should be paying close attention when large investors or company insiders buy or sell large chunks of stock, experts say.
In December – just prior to the 2022 equities bloodbath — veteran money manager Jesse Felder wrote that corporate insiders were selling US stocks at the fastest pace on record.
Meanwhile, retail was still very much ‘risk on’.
The insiders at many of these companies were sending a very “clear caution signal” to retail investors in the lead up to the recent crash, Felder says.
“[For example], over just the past two years insiders at Peloton sold over 6 million shares for proceeds of more than $US700 million,” he says.
“Leading the way was (former) CEO John Foley who sold a million shares at prices over $US100 per share.
“The stock price of the exercise equipment company trades under $US10 today.”
Below is a chart via Bloomberg of online used car dealer Carvana’s (NYSE: CVNA) stock price and insider transaction history (the red flags are sales) since January 2020.
Just check out that sea of red at or near the peak:
CVNA insiders sold more than 15 million shares for proceeds of more than $US4 billion, Felder says. That’s an average price of $US260 per share versus its current $US25 share price.
Felder doesn’t fault executives for taking the opportunity to profit from a “speculative mania” in their shares.
“My point here is simply to draw attention to the fact that investors ought to spend more time watching what insiders do and less time listening to what they have to say,” he says.
“Actions in the markets, as they do everywhere else, generally speak much louder than words.”
Director trades are often considered a good indicator of a company’s future prospects. Our fortnightly Director Trades column informs you who is buying in and who is selling down.
Often referred to as insider buying or selling, directors are legally permitted to buy and sell shares of the company and any subsidiaries. However, these transactions must be properly registered and divulged.
We troll through the ASX company announcements looking at director trades of interest over the past fortnight. It’s usually the big ones that stand out or those coinciding with company news.
Then there’s Trading Places — Stockhead’s semi-regular, pretty damn fascinating recap of the latest red flag buying and selling of ASX small and mid-cap shares.
Specifically, Trading Places tracks substantial shareholder movements – namely when a trade in a company’s stock crosses or falls below the 5% threshold.