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A Strange Trail of Breadcrumbs

Louis BaseneseWith the relentless advancement of mind-blowing technologies like gene editing, artificial intelligence and smart dust — more practical technologies are becoming underappreciated.

However, it’s a grave error to value a technology’s sexiness above ROI.

Take the light-emitting diode (LED) build-out, for example.

The LED industry is presently worth upward of $30 billion, with no ceiling in sight.

Think about how many grocery stores, malls, athletic facilities college dorms still use outdated incandescent lighting systems. Tons!

Yet carrying the associated energy costs forward in today’s world is virtually impossible.

LED demand, thereby, is unquestionable.

So even though they aren’t sexy — LED companies like Keysight Technologies (NYSE: KEYS) could outperform even the most insatiable new technologies.

It just so happens that a top insider has been loading up on KEYS shares.

Director Charles J. Dockendorff recently acquired $499,470 of the company’s stock, which pushes his open position on Keysight Technologies to $1,958,558.

Amazing conviction, right?

Yet before we rush to invest alongside Dockendorff, let’s do a deeper dive.

Is it possible that major insider purchases can be viewed bearishly?

I asked my senior analyst, Martin Hutchinson, to tackle the merits of insider buying/selling.

As it turns out, transactions must be measured on a case-by-case basis.

Hutch’s full report is below.

Ahead of the tape,

Louis Basenese
Chief Investment Strategist, Wall Street Daily


Question: Martin, you’ve agreed to help us compile a library of the most important investment catalysts on Earth.

These are all baseline concepts that every investor needs to know, and today we’ll be discussing insider trading, the legal kind of insider trading, and how it can impact the stock price.

Let’s jump right in, Martin. Tell us why are insiders so important to the market?

Martin Hutchinson: Company insiders buying or selling is often a good indicator of what they think of the company’s prospects, but you have to remember that doesn’t mean they’re right about the company’s prospects.

And also, if they’re trading on nonpublic information, in other words, something they know and the public doesn’t, then their trading could be illegal. It’s a very gray area.

Question: So you’re suggesting right at the top that it’s not a be-all-end-all signal when a company insider buys shares of stock because they actually might be wrong about their own company.

Martin Hutchinson: Very easily, yes. They could be easily wrong about the company’s prospect.

Question: Wow, a CEO being wrong about the company’s prospects. I guess we have to be careful of that.

Martin Hutchinson: Not all CEOs are competent.

Let’s start with the definition of insider. Legally, it’s a director, a senior officer or an owner of 10% of a company’s shares.

There’s the Nasdaq website, which gives information on insider purchases and certain sales. That’s how you can find out about it.

Question: OK, so our viewers could go to NASDAQ.com, navigate and find a list that updates daily?

Martin Hutchinson: It updates daily, yes.

Question: And what are some reasons that an insider may buy shares of their own company?

Martin Hutchinson: Well, there are a number of possibilities.

They may think the market undervalues their company, or they’re confident about the company’s prospects.

They may know about a development, for example, a takeover or a hot new product that will boost the share price. That’s the one that can get illegal fairly quickly.

Or they just got a cash flow, a bonus or a legacy or are deploying capital. Obviously, that has something to do with them, not the company.

And if they’re wealthy and they’re a large shareholder, they may be planning to do a leveraged buyout and take the company private, and that’s obviously interesting as well.

Question: So some of those could help us as investors. Others not so much?

Martin Hutchinson: That’s right, and then you can look at why insiders might sell.

Generally, they’ll have stock options, so they want to balance their portfolio as they exercise the options. They’ll sell some of the shares.

Or they know future sales and earnings will be weak, and that can be doubtfully legal.

They might have cash needs for family and housing, etc. We’ve all got those problems. Two kids going to college simultaneously, that kind of thing.

Or they’re bearish on the overall market, which is sometimes the case.

Question: Continue on. What else? Share some more of your insider wisdom with us, please.

Martin Hutchinson: So to answer the question of what we should do as investors, I think we should take big insider purchases and sales into account in making investment decisions.

Purchases should be one additional positive, but never buy only because of insider purchases, because insiders can be wrong or they could be doing something illegal.

Insider sales can be a useful warning signal of trouble ahead if you own the stock already. So if you suddenly see three or four directors selling, that can be significant.

But if a single insider is selling, it’s probably not significant. So either positively it looks like the prospects are good, or negatively it looks like there’s trouble ahead.

Question: All right. Let’s wrap this one up.

I’m going to ask you two very specific questions.

Say you’re bullish on a stock, but you’re not seeing any active insiders buying the stock. Are you still interested in potentially buying that stock without the existence of insider buying?

Martin Hutchinson: Yes, that doesn’t worry me too much.

Question: Doesn’t worry you a bit? So you still would place a buy order on that one?

Martin Hutchinson: Absolutely, yes.

Question: Now, conversely, what if you’re bullish on a stock, but you’re seeing some insiders selling? Doesn’t that concern you?

Martin Hutchinson: If it’s more than one insider, and fairly substantial amounts, yes, that does concern me.

If they have lots of stock options and it’s just balancing the stock options, not so much.

But if several insiders are selling, then you worry that they know something you don’t.

Question: I think that’s the biggest takeaway for me personally, that if insiders are liquidating their position, I don’t think it sounds like that’s a real good stock to buy.

Fair enough?

Martin Hutchinson: That sounds absolutely right, yes.

Question: All right, Hutch. As always, thanks for your time.

Martin Hutchinson: Great to be with you.

Question: This is Wall Street Daily, signing off.

Smart investing,

Martin Hutchinson
Senior Analyst, Wall Street Daily