Keeping An Eye On The Insiders
Recently we have seen several articles on the merits of tracking insider buying activity and we would like to put our spin on the subject adding our specific interest in the natural resource sector. The junior mining shares are looking better each day as represented by the CDNX (S&P/TSX Venture Composite Index) and investors need all the tools possible at their disposal.
When asked about his investment model, Warren Buffett stated, "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors."
Now being greedy does not mean just jumping in blindly. Buffett is a smart guy and he will study carefully the fundamentals of any company on his list of potential buy candidates.
For many investors the idea of studying the fundamentals of a company, i.e., the balance sheet, profit and loss statements and the company's business model, is quite overwhelming. Most do not have the knowledge or skills to do an adequate job of the analysis which is but one of the reasons why many investors subscribe to various newsletters and publications.
Perhaps there is another approach - 'keeping an eye on the corporate insiders'.
Corporate insiders can be defined as officers, directors and those owning over 10% interest in a public company.
Think about it. Who knows better than the corporate insiders about the company's current business climate, new products coming to market, new discoveries or production results, etc? Insiders could be a good judge as to whether a company's shares are undervalued and provide a good entry level for buying.
Insider Reporting Requirements
Insiders are required to report to authorities, either in Canada or the United States as to their transactions in the company's shares, warrants, debt, etc. Currently in Canada insiders have a 10 day reporting requirement following a transaction. In the United States insiders have a 2 day reporting requirement and this information is available in various places and in different formats on the internet.
It can be a very time consuming process weeding through all of the filings. Sure if you are looking for insider activity on a specific company that is easy and readily available. If you are scanning looking for new opportunities, however? You will have a major challenge. Even if you have access to all of this data, it is a major filtering and decision making process to arrive at any reasonable conclusion. After all, most investors just want to be told what to buy, not to do all of this work.
What if there are no recent insider transactions in a company's shares? Does this mean we should not buy the shares? Not necessarily. We need to remember that, particularly within the junior mining sector, many officers do not receive large salaries, but rather options to purchase the company's shares. Thus, some officers and directors may already have significant positions and, therefore, they may not be currently buying more in the open market.
Another feature to look for would be private placements which are a favorite method of raising cash in the mining sector. What I suggest looking for is insider participation in the Private Placement. In my opinion, if insiders are buying in the private placement of their company's shares this is a great sign of their continuing belief in the future prospects of the company. Usually the private placement is priced close to the current market price and, therefore, we would consider this very akin to an open market buy transaction.
The bottom line is that if the corporate insiders are buying it is usually an excellent sign for investors. In a future article we will discuss the implications of insider selling.
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