Using Insider Sales to Profit in 2011 and Beyond

Many people wonder where they should start looking for growth potential in this ever-changing market.

What I often do is look for extremes…

I look for areas of the market where the rubber band seems stretched. These are usually good places to look for making money as you play the snapback of that rubber band. It doesn’t always work. Sometimes the rubber band breaks. But it’s a fairly reliable way to make good money in markets.

There are a couple of market extremes I keep an eye on when picking portfolio positions for my Mayer’s Special Situations subscribers.

Let me tell you about one of them….

Insider sales can be a good indicator of where a stock may go in the future.

I always troll the insider buys and sells. It’s a great place to get ideas. When I see a big insider lay down a big bet on his own stock, that usually makes me want to take a look at why. Insiders buy for only one reason: They think the stock is going to go up.

Insider selling is not as reliable. There are always more insider sales than buys. Insiders sell stock for all kinds of reasons — diversification, for example. They also typically get a lot of stock options, which they naturally cash in from time to time.

However, what we’re interested in is the extremes. We’re not interested in modest insider buys or modest insider sells.

These ideas simply come from looking at the insider transactions as reported by Barron’s every week. It’s a simple way to build an interesting list of names for your portfolio…

In early November, we saw some extreme selling. In fact, the ratio of insider sales to insider buys was over 30 times!

Normally, a ratio of over 20-to-1 is seen as bearish sign. A ratio of under 12-to-1 is bullish. It’s not a bad indicator — or at least it’s been pretty good this year.

Last time we had an insider sales ratio of over 30 times was in April, just before the markets went kaput for awhile. (The so-called “Flash Crash.”) Then the ratio went under 12 for long stretches during June through September. During this time the market has generally been rising.

In October, we had a spike in insider selling. This indicates that at least as far as insiders go, stocks look fully priced. I look over the insider sales and I see massive selling. At McDonald’s, six insiders sold $40 million worth of stock. At Netflix, five insiders dumped $36 million worth of stock. Other big sellers include two at AutoZone ditching $35 million, three at Safeway selling $27 million and five at EMC letting $24 million go.
I don’t know how investors can feel good about these names with so many insiders selling with such gusto.

On the other side of the ledger, we had a few insider buys. One that sticks out is Alfred Mann’s $5 million buy at MannKind, a biotech firm. According to Yahoo, MannKind, “a biopharmaceutical company, focuses on the discovery, development and commercialization of therapeutic products for diabetes and cancer.”

The ticker is MNKD. Mann is its 84-year-old founder, CEO and chairman. He must really like the stock – he paid Mann paid an average of $7.15 for his shares. Biotech is a bit out of my bailiwick, but the stock is worth looking into.

This stock is currently trading at around $8.00 per share and is one you may want to keep an eye on in this year’s new market.

Sincerely,
Chris Mayer
Penny Sleuth

January 3, 2011

Using Insider Sales to Profit in 2011 and Beyond was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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