Do as They Do: A Guide to Insider Activity
It can give you a sneak peek behind the scenes--if you know what to look for.
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 wasnât 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 themâand 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 theyâre willing to stake their own money on their firmâs stockâor cash out big chunks of itâthose 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 theyâre only buying ten or twenty or even fifty thousand dollars of their companyâs stock, theyâre probably just âpainting the tapeâ to generate interest. Scope is also important when it comes to stock sales. Who knows? Maybe someoneâs 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 doesnât cross into the six or seven figure range, itâs 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 Brickâs inner workings have great confidence in its future. Their confidence wasnât what prompted me to buy the stock, though. What made me buy the stock was my own confidence in them. Insider buying doesnât matter much if you donât have faith in the insiders doing the buying. In Green Brickâs case, weâre 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 companyâs 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, Highlandâs co-founder and Nexpointâs president James Dondero has bought up whopping amounts of NXRT, totaling over $10 million, and itâs not hard to see why. The rental market is white hot right now, especially in Dallas and Atlanta. Nexpointâs Net Asset Value is roughly $15 a share, and yet to date Wall Street has completely ignored the firm. Itâs 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 companyâs insider activity: the company itself. Just because insiders are buying stock in a business doesnât mean you should. Iâve 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 companyâs prospects. You donât 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, Beloâs 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 companyâs plans to acquire smaller media firms. Iâm a journalism junkie. Every year, I donate to journalism projects and education programs. I hope Belo succeeds and I hope Mr. Moroneyâs investments in the company pay off handsomely. Nonetheless, despite how impressed I was by his convictionâwhich he demonstrated by buying all that stock with his own moneyâI just couldnât bring myself to share it.
