Turnaround Investing Blog

George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.

Insider Buying/Insider Selling

The Inside Track on Insider Buying

Steve Cohen, the high profile hedge fund manager, narrowly escaped a prison sentence for trading on insider information. Yet cable billionaire John Malone’s recent insider buying of $16 million of Liberty Global shares, where he is Chairman of the Board and clearly knows a lot of non-public information, is perfectly legal and may be a valuable signal to investors. Can both be possible at the same time?

The not-so-simple answer: yes, and no. It depends on who is involved and what they are doing.

For nearly a century, the United States Securities and Exchange Commission (SEC) has sought to protect individual investors from trading by people who know secrets about companies. If these people could freely trade on critical private “inside information,” perhaps that a company was about to be acquired at a huge premium, or that an earnings report was going to be a disaster, investors might view the stock market as unfair. This would not only damage the public’s confidence in the market, but also impair its capital-raising function.

What qualifies as “inside” information? The widely-used definition is “material, non-public information”—that is, something that could likely have a meaningful impact on the stock price or that a reasonable investor would consider important when making an investment decision. And, it needs to be information that isn’t generally known by the investing public. If you overhear a barista at Starbucks talk about how well the new iced coconut milk macchiato is selling there, that’s not material as Starbucks has 26,000 stores and sells hundreds of different drinks. However, it you somehow learn that total company revenues across the entire chain will be up 12% next quarter, that’s material.

Just knowing the information isn’t illegal—it’s what you do with the information that matters. If you trade on “inside information,” or in some cases merely pass along that information to others who then trade on it, that’s illegal. Hedge fund managers and anyone else who trade on or are involved in passing along this kind of information should be prepared to spend some time in a court room on “insider trading” charges.[*]

However, this tight restriction could be unfair to officers and directors of public companies. They might rightfully want to buy and sell stock in their company, yet are also in a position to know a lot about their company that isn’t public. The SEC has carved out some protections for this group, whose trades are often referred to as “insider buying.”

As long as these corporate “insiders” buy and sell within specific rules, are not taking advantage of material, non-public information, and properly report these trades to the SEC, it’s perfectly legal. John Malone, of Liberty Global, followed these rules so his trades were legal.

For investors, these reported “insider” trades can indicate that those with the best knowledge of a company believe it will do better in the future. Long before anything newsworthy happens, or before an upturn appears in a company’s financials, an insider may see positive changes and purchase the company’s stock. This can be a sign that “outsiders” should consider buying it, too. Numerous academic studies support this idea and we agree that insider buying can be a useful investing signal.

Insiders who buy their company’s stock aren’t always right, however. It’s possible for insiders to be too close to a company and miss some broad, negative signals; or someone can be so loyal to their company that it clouds their thinking. There have been a number of cases where an insider buys into their company only to see the stock slide downwards.

Perhaps the most valuable insider buying signal is when a healthy company’s stock is temporarily out of favor and a savvy, highly credible CEO makes a large public purchase. In a famous example, Jamie Dimon, CEO of JPMorgan, bought $26.6 million of his company’s stock in February 2016 at $53.18, at a time when most investors were selling heavily. By year-end the shares traded at $86, for a 62% gain worth over $16 million that everyone would like to take to the bank.

[*] This note is intended as a general overview of insider trading regulations for investors, and is not intended as legal advice. Insider trading case law and regulations are complicated and can change, sometimes abruptly. Please consult a qualified attorney or compliance officer if you need more specific guidance or advice.

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Amazon = US GDP 1970

Amazon joined Apple in reaching a $1 trillion market capitalization. $1 trillion is about the same as the total value of New York City property and the total value of loans at JP Morgan, the nation’s largest bank in terms of assets. Jeff Bezos’ $160 billion stake would place him (personally) as the #33 largest company in the S&P 500 in terms of market cap, next to Coca-Cola, Disney and Netflix. We aren’t bold enough to predict whether the shares will continue upwards or if they are in a bubble reaching maximum inflation. Setting aside for a moment their investment prospects, let’s admire the truly remarkable milestone that these two companies have reached. Read More.

EV/EBITDA: What Is It & Why Are We Using It More?

In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple.  We thought it might be useful to describe this measure and why we like it.

Read More.

Turnaround Letter Stock Pick Named Top Performer of 2017

 

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What Last Year's Top Stock Pickers Are Buying in 2018

 

This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.

 

George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."