CEO Knows Best

The saying about insider stock transactions goes like this, “there are many reasons for insiders to sell but only one reason for them to buy.” Like most stock market aphorisms, history shows this holds far more than a grain of truth.

This past week insiders at TFF Pharma (TFFP) stepped into the market and bought stock for the one reason they do so; they think it’s going higher. In their opinion, shares of TFF are too cheap and not reflective of the fundamentals. I.E., It’s a compelling buy.

With these purchases, that come on the back of Chairman Aaron Fletcher’s $3.5 million purchase two short months ago, approximately 125,000 more shares went into strong hands this time. Importantly it wasn’t just the Chairman buying this time as the CEO, CFO, and another board member joined in on the shopping spree.

I have often highlighted insider buying as a great signal for a stock. When those who know the most are willing to double down on their commitment to a company’s future, it’s a powerful statement. They know how things are going and, when they buy, are essentially telling investors that things are going very well.

Several of our companies have seen insider buying lately. This activity has been led by Anixa (ANIX), which has seen continual buying after every earnings release for over 2 years now. By the way, Anixa is the only stock in TW’s universe that is up for 2022. Coincidence? I don’t think so…

“A number of studies have investigated the informational role of insider trading also in a broader fashion. Based on their transactions around corporate actions/events, this strand of literature shows that mangers are indeed better informed than outside investors about their firms’ prospects. For example, John and Lang (1991) show that insider trading is associated with the share price reaction after a dividend announcement. Allen and Ramanan (1995) find that insider buying confirms the favourable information captured by positive unexpected earnings. Ikenberry et al. (1995) prove that corporate share repurchases predict high future returns and Lee (1997) shows that top executives’ trading is associated with the long-run stock returns of seasoned equity issuing firms.

The overall evidence thus suggests that insiders possess superior information and that their trading activity conveys important signals to the market. EDHEC Risk Institute, July 2008

Reports show that, in aggregate, insiders tend to be excellent market timers. When stocks are at high valuations, as a group they sell. Conversely, when their stocks are beaten up, insiders see the upside and are aggressive buyers. So, taken as a group, CEO’s are excellent market timers.

In the biotech space, however, their activity has increased importance beyond the overall market. In these companies, the historical records indicate that insider buying is very indicative of future outperformance by a company.

After looking at over 4,000 transactions, here’s Cowen’s 2014 analysis of the importance of following insiders in biotech firms.

Insider Purchases Predict Outperformance, While Insider Sales Do Not Predict Underperformance

We found a consistent pattern of outperformance in stocks compared to the NASDAQ biotech index following purchases, over each of the time periods analyzed. Following purchases by insiders, stocks outperformed the NBI on average by 1.5% over 30 days, 4.8% over 90 days, 8.2% over 180 days, and 19.5% over 365 days. Conversely, following insider sales, the stocks of the 10 companies analyzed performed on average more or less in line with the NASDAQ Biotech Index over the subsequent 30 (-0.1% relative performance), 90 (+0.7% relative performance), 180 (+1.9% relative performance) and 365 days (+3.9% relative performance). Most striking, the stocks performed markedly better after insider purchases compared to insider sales. Over every time period the stocks appreciated by a greater amount, and they outperformed the NBI and S&P500 by a wider margin. The difference in performance is actually quite large: in the 30, 90, 180 and 365 days following purchases, the stocks appreciated by 1.5%, 5.2%, 9.4%, and 16.5% more than they did over the same period following sales, on average.

This past week saw nice outperformance of the TW portfolio relative to the market. This performance was led by TFF’s 27% return on the week. As I highlighted last week, the issues worrying investors don’t seem to be shared by insiders; their activity on Monday and Tuesday certainly provided more emphasis to that statement.

Over the last few weeks, we have seen buying from insiders at Anixa, TFF and INmune Bio (INMB). According to Cowen’s analysis, we should be paying attention to this activity. With all three in the middle of clinical trials, if these insiders get it right, investors stand to reap some pretty fantastic rewards. I am betting they get it right…

While Cowen didn’t find any significant correlation between insider selling (remember, this happens for many reasons) and stock market returns, I recently suggested to readers shorting one company based on impending insider selling. Tesla (TSLA) at $1,080 per share, was not only priced for perfection, but Elon Musk, in a brilliant move, had his Twitter followers vote for him to sell many billions of dollars in stock.

It was a wonderfully shrewd move; selling to make the masses happy and not because he had a big tax bill coming. I truly admire his genius (and the blind loyalty of his legions). That said, with the FED beginning to take liquidity from the market, where was $20B in new buying going to come from? Along with the market, Tesla in particular was due for a significant correction; we are now in the middle of that.

I continue to believe that Tesla has more risk to the downside and would much rather be short than long this stock.

Speaking of downside, the market had a nice Friday afternoon rally to close essentially unchanged on the day. A nice comeback from a bad day, yet the week was still miserable for stocks. As I wrote last week, I believe we are in the early innings of what could be an extended correction for stocks and I think that, for the overall market, the risk remains to the downside.

That said, there’s always opportunity and one place investors with some cash should be considering is movements around the upcoming Russell rebalance. There are more than a few companies exiting the index. Generally speaking a lot of trading to position around the rebalancing takes place prior to the actual dates when the constituents change.

With the ongoing dearth of buyers, shares of these companies are taking it on the chin and could be getting set up for a nice relief rally. One I would highlight to look at is Paretek (PRTK). Paretek is expected to be deleted from the R2K, creating selling of close to 4.5 million shares. The stock has been pummeled in anticipation of this, yet fundamentals remain strong and this is a cheap stock on a price/sales ratio.

In our universe, Atomera (ATOM) is the only stock impacted by the Russell rebalance with expected net buying of over $1M USD.

This week I published an interview with RJ Tesi and CJ Barnum of INmune Bio (INMB). I can’t stress enough how important I believe their comments are. If you haven’t read it, please do so. If you have, reread it.

Other items on the recommended weekend reading list are:

TW Research's Disclaimers & Disclosures: TW Research may have been compensated for writing this article. For a full list of disclaimers and disclosures, please visit


    • Not small buys. Over $600K.

      They don’t know until Union decides. They can only surmise thus not restricted.


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