do as they do: a guide to insider activity

A few weeks back, I flew to Dallas and hit an unexpected trifecta: in a single day, I visited three companies with strong insider buying. I wasn’t aware of this coincidence until after I scheduled the meetings and began researching the companies. I was pleasantly surprised. Significant insider buying is quite rare. It almost never happens here in the Bay Area, where tech firms hand out stock options like napkins. Needless to say, I was intrigued by each of these companies. However, I only wound up buying stock in two of them—and the reasons why are important.

Insider buying (especially at or near a 52-week high) or insider selling (especially at or near a 52-week low) are clear indications that a stock could be mispriced. After all, who knows a business better than the folks running or overseeing it? If they’re willing to stake their own money on their firm’s stock—or cash out big chunks of it—those of us on the outside might want to do the same. A few years back, the stock of Susser Petroleum (SUSS) was languishing in the $20 range. The family that owned the company started buying monster prints left and right. A few years later, Susser was acquired for $80 a share. Conversely, La Quinta (LQ) crashed this past week when its CEO unexpectedly retired. As others have pointed out, that same executive recently unloaded huge amounts of his stock holdings.

The first thing to evaluate when it comes to insider activity is its scope. Most corporate executives and board members are wealthy people. If they’re only buying ten or twenty or even fifty thousand dollars of their company’s stock, they’re probably just “painting the tape” to generate interest. Scope is also important when it comes to stock sales. Who knows? Maybe someone’s kid is about to go to college and they need to pay for tuition. Maybe they want to buy a fancy new car or add a wing to their beach house. Bottom line: if buying or selling doesn’t cross into the six or seven figure range, it’s probably not worth paying much attention to. Luckily for me, insiders in each firm I visited that day in Dallas had recently acquired sizable new positions, worth hundreds of thousands and even millions of dollars.

The first company I looked in on was developer Green Brick Partners (GRBK). I mentioned Green Brick a few weeks ago. As I wrote then, two of its principle owners, Dan Loeb and David Einhorn, as well as five of its directors bought into a recent secondary stock offering. That is virtually unheard of, and it shows that the folks most familiar with Green Brick’s inner workings have great confidence in its future. Their confidence wasn’t what prompted me to buy the stock, though. What made me buy the stock was my own confidence in them. Insider buying doesn’t matter much if you don’t have faith in the insiders doing the buying. In Green Brick’s case, we’re talking about extremely savvy businesspeople. After the 2008 housing crash, Einhorn started acquiring undervalued properties in Atlanta and Dallas, two regional centers he smartly bet would recover rapidly. The company’s CEO, Jim Brickman, has a long track record and an impeccable reputation. And, thanks to Einhorn, Green Brick is able to take advantage of large NOLs from a failed ethanol producer.

The second company I visited that day in Dallas was a new REIT called Nexpoint (NXRT). Like Green Brick, Nexpoint operates mainly in Texas and Atlanta. It owns 12,000 apartments in those two regions and pays a 21-cent quarterly dividend, for an industry-leading yield of 5.9 percent. On April 1st Dallas money management firm Highland Capital spun Nexpoint to holders of a Highland closed end mutual fund. Since then, seven insiders have purchased shares on the open market at prices ranging from $12.56 to $14.80. Most notably, Highland’s co-founder and Nexpoint’s president James Dondero has bought up whopping amounts of NXRT, totaling over $10 million, and it’s not hard to see why. The rental market is white hot right now, especially in Dallas and Atlanta. Nexpoint’s Net Asset Value is roughly $15 a share, and yet to date Wall Street has completely ignored the firm. It’s only a matter of time until analysts initiate coverage, which will likely be positive and drive investors into the stock.

That brings me to the most important factor to consider when you evaluate a company’s insider activity: the company itself. Just because insiders are buying stock in a business doesn’t mean you should. I’ve seen plenty of owners, executives, and directors go broke right along with their businesses.

As I write in my book, Dead Companies Walking, corporate insiders are often overly optimistic about their company’s prospects. You don’t rise to the top of your profession and gain control of a publicly traded firm without believing in your abilities. Even in the face of the longest odds, most senior executives and their colleagues on corporate boards tend to believe they will prevail. That can affect their stock buying decisions.

The third company I visited that day in Dallas was AH Belo (AHC). Belo operates the Dallas Morning News and other media holdings, as well as parking lots in Dallas and Providence, Rhode Island. Like all big city newspapers, the Morning News has steadily lost subscribers during the last decade. On the other hand, Belo’s parking business generates a considerable amount of cash. Like Nexpoint, Belo also pays out an impressive dividend, currently 6.4 percent. And like Nexpoint and Green Brick, it has seen strong insider buying of late. Its CEO James Moroney recently bought 44,000 shares of stock near $5 a share, and now owns 250,000 shares in all.

I enjoyed meeting with Mr. Moroney and listening to him explain the company’s plans to acquire smaller media firms. I’m a journalism junkie. Every year, I donate to journalism projects and education programs. I hope Belo succeeds and I hope Mr. Moroney’s investments in the company pay off handsomely. Nonetheless, despite how impressed I was by his conviction—which he demonstrated by buying all that stock with his own money—I just couldn’t bring myself to share it.

One thought on “do as they do: a guide to insider activity

  1. Pingback: why jamie dimon’s big insider purchase may not signal a bottom for financials | the confessions of a contrarian investor

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