The Benefits of Studying Insiders’ Trading Patterns
Excerpt:
S&P Capital IQ, a unit of McGraw Hill Financial Inc.MHFI +1.02%, looked at trades by chief executives of companies in the Russell 3000 index, one of the broadest measures of the U.S. stock market.
The results were pretty surprising. In the six months through Oct. 31, stocks of companies in which CEOs had been net buyers—that is, they bought more shares than they sold—did more than six times better than the Russell 3000, on average, in the five days after the trades were filed with regulators (usually a couple of days after they occurred). The shares also beat the index in the month and three months afterward.
One possible explanation: When the top executive buys, other investors follow suit on the assumption the CEO knows something outsiders don’t. “CEOs may not be more skilled traders but their actions may be better publicized,” says David Pope, managing director of quantamental research at S&P Capital IQ.
Crucially, the results were much-less predictive when looking at CEOs’ sales.
Before investors embark on a strategy of slavishly following CEOs’ stock purchases, though, they should consider three caveats.
Executives can be overenthusiastic about their companies’ prospects, leading shareholders down the wrong path.
Full article The Benefits of Studying Insiders’ Trading Patterns – MoneyBeat – WSJ.
