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Three (or Five) Rules of Thumb for Watching Insider Trading: Ted Dixon



-- Posted Friday, 14 June 2013 | | Disqus

Data on trades made by company insiders—key executives and directors—demonstrates to Ted Dixon, co-founder and CEO of INK Research, that most of them are contrarian in their approach. Lately, Dixon finds that insider indicators in the gold and junior gold miner sectors are "off the charts." In this interview with The Gold Report, Dixon shares his insights into why, when and how insiders are trading.


The Gold Report: Ted, INK Research monitors stock transactions made by key executives and directors inside their companies and uses that data to develop sentiment indicators for various indices and sectors. How does your system work?

 

Ted Dixon: When we look at a market and a sector, we use insider activity—buys and sells in the public market—to get a sense of how those insiders feel, not just about their company, but about the overall market or sector. This led us to develop what we call a sentiment indicator, which is basically a daily poll of insiders. You could compare it to the polls you see during election campaigns. Every night, we take a poll of what insiders are doing within the market and the sector. We aggregate all of the buys and sells in the different companies in that sector to get a sense of the overall mood of insiders in that area.

 

TGR: The sentiment indicators at the moment show almost twice as much insider buying among Toronto Stock Exchange-listed stocks as selling. Yet, the opposite is happening in the American market. How do you explain that?

 

TD: One of the rules of thumb when looking at insider activity is that insiders tend to be contrarian. They like to do the opposite of what other people are doing.

 

In 2013 to date, the U.S. market has had a nice run as the indices have been hitting new, all-time highs. As everyone else is piling into the market and chasing momentum, insiders, being contrarians, are selling into that and are taking profits.

 

We have not had quite the same ride here in Canada; different sectors have experienced different fortunes. Some sectors and stocks have been hit hard. Because they are contrarian, insiders will go shopping for bargains during periods of selloff. While everyone is hitting the sell button, insiders and select companies will pick up stocks that have been beaten down. The key element to keep in mind here is the time horizon. Insiders typically have a long time horizon. The fact that they may be buying does not mean they expect a 50% reversal over the next two or three months. It means that, over the long term, the risk-reward ratio has improved enough for them to jump in.

 

TGR: Among the TSX Venture Exchange-listed stocks, insiders are buying almost eight times more than they are selling. What trends have emerged from insider buying on the Venture Exchange?

 

TD: Before the Lehman Brothers collapse, insiders were a bit more opportunistic in their buying and selling. Since then, we have seen a long-term, secular commitment to buy among junior miner insiders. This has been going on for quite a while, but as we go through bouts of selloff in the sector, insider activity within the junior miners tends to pick up. That is happening now.

 

In fact, it would concern us if there were no increase in insider activity when junior miners sold off. That might indicate that insiders are giving up on the sector. We are not seeing that.

 

TGR: Where is your Venture Exchange sentiment indicator on a 12-month horizon?

 

TD: It is near all-time highs, just as the Venture Exchange index works down toward new multiyear lows. We have been at elevated buying levels, driven primarily in the gold group. The spring saw a massive spike.

 

TGR: Does a spike in insider buying in an underperforming sector generally predict medium- or long-term equity performance?

TD: It is important to remember that insider activity and the INK indicators are not a silver bullet to market timing. They are used in conjunction with the technical indicators that many of your readers follow and the fundamental research they do.

 

It is important to look at insider activity during a major selloff correction or a major rally: What are the insiders doing? Is insider activity spiking, suggesting a turning point is near?

 

Right now, we see a major move to the downside in commodity stocks and a major spike in insider buying. That is also what happened in December 2008. It is almost as if the mining industry is going through its own Lehman Brothers moment. Our indicators suggest now is the time to be bargain hunting for good companies. The time to exit the industry was a while ago.

 

TGR: Did you notice a significant change in insider buying or selling in the gold sector when gold had that significant selloff in April?

 

TD: Absolutely. When gold sold off in April, our indicator for the gold group jumped substantially. It got as high as 10:1, meaning 10 gold companies had key insider buying for every one that was selling. That is an astronomically high level of buying.

 

We had another test of that in early June when we saw renewed weakness in the gold stock indices and the gold price. Buying picked up. Insiders seem to be suggesting that they are very interested as the S&P/TSX Gold Composite Index toys with the 1,500 level.

 

TGR: Is there any seasonality at play, given the adage "sell in May and go away?" Or, has it changed to "buy in May?"

TD: I think price level is the key factor, not the month of the year. In the U.S., there was a nice rally into May, and we saw a lot of insider selling across the board. In Canada, among the miners, prices have tumbled to a level that is attracting significant insider interest.

 

TGR: It is also meaningful that, in the junior mining sector, when an executive adds to his or her position in a smaller company it can mean a significant percentage of ownership; for a larger company, it is often a drop in the bucket. What are some recent examples in the junior gold space where an executive has exercised options or bought shares that resulted in a significant increase in his or her stake in the company?

 

TD: You are absolutely right about the importance for smaller companies, Brian. When Nejat Seyhun did his comprehensive study of insider activity in 1998, "Investment Intelligence from Insider Trading," he found that top executives such as CEOs and CFOs of smaller firms outperform the market by about 8% a year.

 

You get a better bang for your buck, on average, with smaller companies. I say on average, because in some cases insiders still suffer from wishful thinking and miscalculation.

 

Most of the insider buying is in the junior and the small companies. We have an indicator list that tracks what we call key insider buying—beneficial ownership buying where officers or directors directly own the interest in those stocks; they are not managing other people's money. Our users can also generate net buying lists.

 

TGR: How do your subscribers use your research?

 

TD: One of the most popular ways of using INK is to look at what insiders are doing with their options, both when they are being granted in some of the smaller companies and when they are exercised. Do they sell all their shares? Do they hang on to all or some of them?

 

That is particularly important in some of the mid- to larger-cap companies. We want to see if they are exercising options and not selling. It is encouraging to see insiders building their positions.

 

That said, sometimes insiders have to sell a portion of their compensation-related awards to pay taxes and the exercise costs, depending on the plan. There is no real standard in how compensation plans are structured. It is important to dig down into the details. We like to see insiders paying their taxes or exercise costs and then hold on.

 

TGR: What are the best ways to use the information INK provides?

 

TD: Three rules of thumb. First, good things come in small packages. Small companies are where you will get the most bang for the buck following insider activity.

 

Second, insiders usually go against the flow. They are contrarian. When a stock is falling, it is a good signal if insiders are buying.

 

Third, sometimes insiders go with the flow. When they are selling when everyone else is selling, that typically is not good news. When they are buying when other people are buying, it is usually pretty good news.

 

TGR: And four and five would be to follow the CFO and look for multiple executives buying.

 

TD: Right. Multiple executives buying along with the CFO indicates a good situation, especially if it is real discretionary buying as opposed to stock awards. If we see the CFO and other executives buying during a selloff, we have more confidence in that signal than if it is a single insider.

 

TGR: Investors in the gold space and the junior gold space have been beaten and battered. Can you leave them with something that might raise their spirits?

 

TD: For contrarians, the best time, up until now, to buy junior gold miners was November and December 2008. However, in the wake of the recent pullback, our insider indicators are off the charts. The time to start looking for bargains is when everyone has left the room, not when your next-door neighbor is talking about the latest gold stock he or she bought.

 

TGR: Ted, thank you for your time and your insights.

 

Ted Dixon is co-founder of INK Research; INK stands for Insider News and Knowledge and is Canada's first online financial news and research service providing investor insight into what public company executives and significant shareholders are doing with their ownership interests. INK is also first in North America to provide a free source of insider trading alerts and reports across both the U.S. and Canadian stock markets. Free INK services are found on CanadianInsider.com andInsiderTracking.com. Dixon has also lectured in corporate finance at the British Columbia Institute of Technology. Before starting INK, he worked at the Connor, Clark & Lunn Financial Group where his responsibilities included portfolio strategy and product development. He has also been an analyst at the Fraser Institute and a treasury specialist at TD Bank. In the early days, he was a floor trader on the Vancouver Stock Exchange. Dixon is a Chartered Financial Analyst and member of CFA Vancouver (formerly The Vancouver Society of Financial Analysts). He holds a Master of Business Administration in financial management from the University of Chicago and a Bachelor of Commerce from the University of British Columbia.

 

 

DISCLOSURE: 
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor.
2) Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Ted Dixon: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. 
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

 

Streetwise - The Gold Report is Copyright © 2013 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

 

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

 

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.


-- Posted Friday, 14 June 2013 | Digg This Article | Source: GoldSeek.com

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