External perceptions vs. Insider Reality

There is no doubt that investors in today’s markets require increasingly sophisticated knowledge. For quantitative and fundamental portfolio managers, proprietary traders, and equity research managers alike, tracking a wider array of data sets such as insiders and directors’ trading activity is essential and becoming the norm.

It is a reasonable assumption that directors and significant shareholders know more about their companies and the value of their businesses than the rest of the market. Therefore it clearly pays to know what they are up to. While insights into trading activity of insiders provide a good sense of a stock’s prospects, the speed and accuracy of this information can be unreliable. It can take days, even weeks in some cases, for most investors to get their hands on news of buying or selling. The fluidity of transactions has increased tremendously, so much so that access to global scale real-time data is fast becoming critical to success.

The 2iQ Research platform, with a rigorous data collection process in place, creates an aggregated and cleansed data source allowing clients to gauge insider sentiment at company, industry or even country level. It is not always obvious which executives or leading holders’ transactions tend to be indicative of future performance, so it is important to leverage a deep data set, in order to know who to watch and to track their buying and selling patterns. In many cases following transactions by CEOs and CFOs can bring invaluable indications of the true sentiment that lies beneath misleading superficial indicators.

Take, for example, a comparison of two stocks representing two very different industries: Ultra Electronics Holdings (ULE:LN) and a household name like Adidas AG (ADS:GR)

The share price for Ultra Electronics Holdings fell dramatically following analyst concerns for its organic growth, combined with delays during the takeover of US-based Sparton Corporation and the surprise announcement in November of the departure of CEO Rakesh Sharma. Despite the external indicators of bearish stock performance on which most of the investment community would make their decisions, our data tells a different story: of bullish sentiment among multiple insiders who have taken the opportunity of a significant share price decline to increase their stake in the company.

In contrast at Adidas AG insider activity was somewhat stagnant in the early part of 2017 – but then swiftly accelerated with significant, multiple buying activity taking place among key insiders, including the CEO and CFO. The company’s latest earnings release was undoubtedly a significant factor in prompting the buying flurry. This encouraging insider activity combined with strong growth indicators within the company, and improving economy in Europe in general, could mean that the company will continue its growth trajectory in the coming quarters.

It is, without doubt, critical to take into account in decision-making all external factors that affect share prices. But that is not the only data that matters. Insider transactions provide an invaluable lens on a company’s overall health and financial outlook. Isn’t it time to take all the information into account to create the most profitable opportunities?

Let us put our knowledge at your fingertips – comprehensive data on individual stocks by 2iQ Research can help you make better-informed decisions.

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