While insider transaction data can help investors identify opportunities at the individual stock level, it can also be used at sector and market-level to identify attractive opportunities. Studies on insider trading have found that aggregate insider transaction activity, or broad insider buying and selling patterns, can be a powerful predictor of sector and market returns.
Zooming out on the data today, one trend that stands out to us is that insiders at small US banks are buying stock in droves right now. This year, we have seen insiders snap up millions of dollars worth of stock in this area of the market. So, what does this mean for investors? Is this insider transaction activity a signal that this area of the market is about to rip higher?
Insider Buying at US Regional Banks in 2022
Our insider transaction data shows that in 2022, there have been a considerable number of substantial insider purchases at US regional banks. Year to date, we have observed nearly 20 insider purchases worth over $75,000 in this area of the market. Of those transactions, six were worth more than $200,000.
We have listed insider trades worth $75,000 or more in this industry below:
It’s worth noting that we have covered a number of these trades in our insider buying reports. For example, on February 1, we looked at the $229k CFO purchase at Flagstar Bancorp. Meanwhile, on February 8, we looked at the $350k in buys at Banc of California. In both reports, we said that we saw insider buying as a bullish indicator.
Looking at this insider transaction trend, we think there’s a good chance that this area of the market could outperform in 2022.
One reason we say this is that insiders in this industry have shown the ability to ‘buy low’ in the recent past. If we go back to late 2020, insiders at small US banks were buying stock heavily then too. And look at how this area of the market performed in early 2021. In the first quarter of 2021, both the Dow Jones US Select Regional Banks and the Nasdaq Regional Banking indexes surged more than 25% to new all-time highs. As is often the case, insiders were one step ahead of the rest of the market and were able to make substantial gains from their industry knowledge.
Another reason this area of the market could outperform in 2022 is that the economic backdrop is highly supportive.
For a start, the US economic recovery has spurred consumer spending, which is encouraging companies to boost their inventories. This is increasing demand for business loans.
Secondly, the US Federal Reserve is expected to lift interest rates at least four times in 2022. Higher interest rates benefit banks as it leads to higher net interest margins.
Finally, valuations across the sector remain attractive. At present, the KBW Regional Bank index is currently trading at around 70% of the S&P 500's multiple compared with its more typical 90% level. So, there’s value on offer right now.
It’s worth noting that while investors have been positioning their portfolios for Fed rate hikes for some time, many analysts believe bank stocks do not fully reflect these expectations.
"Conceptually it's priced in but quantitatively there's potential for more upside," said Piper Sandler analyst Jeffery Harte recently.
Meanwhile, KBW's director of research, Matthew Kelley, recently pointed out that in the 2016-2018 Fed tightening cycle, bank stocks did not peak until 21 months after the central bank started raising rates.
Putting this all together, we think that US regional banks look attractive right now from an investment point of view. The economic backdrop is highly supportive and insiders – who are typically ahead of the curve – are buying stock hand over fist.