Insiders buy on the basis of inside information. Which is why, in case you may be wondering, their buy and sell decisions consistently result in returns that outperform the returns generated by those of us who rely on press releases. And the group relying on public information, by the way, includes roughly 90% of all institutional investors.
As it turns out, the fact that insiders routinely outperform the rest of us when buying or selling their own company’s stock has been a well-established fact for several decades.
In a landmark study on this subject, researchers at the University of Pennsylvania (Fischer Black and Eugene Fama) found that insiders routinely outperformed the market. One small study conducted by University of Pennsylvania researcher Jeffrey F. Jaffe reported ( The Journal of Finance, Vol, XXXI, No. 4, September 1976) that when three or more insiders bought their company’s stock AND there were NO insiders selling, the stock returns to those insiders in the following six months were, on average, 9.5% greater than the return to the stock market as a whole.
In a much larger study by Hasan Nejat Seyhun of the University of Michigan Graduate School of Business Administration, Division of Research, the results were not as strong but still showed that insiders have the upper hand when it comes to stock market information. (Why Does Aggregate Insider Trading Predict Future Stock Returns? By HN Seyhun – The Quarterly Journal of Economics, 1992 – www.jstor.org)
Dr. Seyhun looked at more than 1.5 million insider transactions in publicly held firms over a six-year period. The transactions were conducted by insiders at 790 firms. Dr. Seyhun selected the firms by using a stratified random sampling technique on the size of the firms’ equity.
Dr. Seyhun also divided his analysis into four basic holding periods: the first from one day after the insider trading day to 120 days thereafter. The second period was from insider trading day one to 33 days thereafter. The third period was 34 days after the insider trading day to 72 days after the insider trading day. The last period was from 73 days after insider trading to 120 days after the insider trading day.
What did he find out?
The average gross profit ABOVE market returns was 2.5% for the overall period, and it was 1.4%, 0.6%, and 0.5% for holding periods two, three and four, respectively.
All three values for the subperiods are statistically significant given the large sample size.
While the magnitude of the average abnormal profit following insiders’ transactions was small, it was statistically significant and also probably illustrated that many of these transactions were due to non-information reasons.
So, it seems, ALL insider transactions still deliver above-average market returns. But when those transactions (as in Jaffe’s study) are strongly weighted in one direction or another, then the potential returns are higher (9.5% in the Jaffe study versus 2.5% in the Seyhun study).
The bottom line is that stock prices rise abnormally following insiders’ purchases and decline abnormally following insiders’ sales.
Since January, then, which orthopedic company managers or directors have been buying shares of their own company and which have been selling?Â
Buyers first.
Insiders at four orthopedic manufacturers are clearly signaling BUY with their own transactions. They are:
- Symmetry Medical. 14 buys – 0 sells. Since January fully 14 insider buys have been registered with the SEC versus zero sells. What’s really interesting is that up until January, virtually all insider transactions were sells. The surge in buying occurred actually quite suddenly in January and has been sustained ever since.  Â
- TranS1. 10 buys – 0 sells. Since January records at the SEC show 10 insider buys and zero sells. Someone clearly knows something and likes this stock at these levels.
- Alphatec Spine. 7 buys – 0 sells. The records at the SEC match with the buzz right now around ATEC. At surgeon meetings, surgeons are now talking about the resurging Alphatec.
- Wright Medical. 4 buys – 0 sells. As our extremities analyst Dev Joshi noted in a companion article, Wright Medical is increasing its extremities business significantly and is poised, we think, to overtake DePuy to become the largest supplier (measured in sales) of extremity implants and instruments. Buyers, incidentally, included CEO Gary Henley.
Sellers next.
- Kensey Nash.  2 buys – 80 sells. This list was really something to behold. After poring over 26 company records, when we saw KNSY’s record we were impressed. Since January, insiders have filed 80 times to sell stock.  Â
- NuVasive. 0 buys – 16 sells. One thing to remember, there are many reasons to sell a stock when you are an insider. New house to buy, etc. But there is really only one reason to buy a stock―you think it will go higher. We are reminded that NUVA posted the strongest market share gain of any spinal implant company in 2008. And the trend toward lateral access appears to be accelerating.
- MAKO Surgical.  0 buys – 13 sells. This Florida-based company is innovating a new computer and robot-guided knee surgery platform. Although there were 13 sells, it was only one seller―the co-inventor of MAKO’s technology, Rony Abovitz.
- Integra LifeSciences.  0 buys – 3 sells. Again, only one seller – the CFO and EVP of Administration, John Henneman III.  Â
Insiders of the following companies either weren’t buying or selling or they did both―so no clear direction could be determined.
- J&J. 1 buy – 3 sells
- CONMEDonMed. 3 buys – 3 sells
- Zimmer. 0 buys – 0 sells
- Smith & Nephew. 0 buys – 0 sells
- Stryker. 0 buys – 0 sells
- Orthofix. 0 buys – 0 sells. Although it was notable that in the final quarter of 2008, insiders (along with dissident shareholder Ramius) were buying the stock!
- Medtronic. 0 buys – 0 sells
- Exactech. 0 buys – 0 sells
- Orthovita. 0 buys – 0 sells
- RTI Biologics. 0 buys – 0 sells
Anyone can look this up. A website that has organized this handy information is http://www.insidercow.com/.
Who says you can’t use inside information to buy stocks? Good hunting all.
