Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Insider Buying Signals Undervalued Stocks
Transcript
- Lucas: So the S&P 500 is sitting at 7,517 today, up a bit over the last week, but the Russell 2000 is actually down nearly 1 percent over the same stretch. Small caps are getting crushed, and the narrative is that they're cheap for a reason—slower growth, higher debt costs, you name it. Luna: Right, and that gap has been widening. But I've been looking at some insider buying data that makes me think the selloff might be overdone in a few names. Lucas: That's exactly what I want to dig into today. Insider buying—when a company's executives or directors use their own money to buy shares on the open market. It's one of the most concrete signals that the people who know the business best think the stock is undervalued. Luna: But it's not always a buy signal, right? I mean, there's a lot of noise in those filings. Lucas: Absolutely. You have to separate genuine conviction from compensation-driven grants. The SEC requires insiders to file a Form 4 within two business days of a transaction, so the data is timely. But a lot of what looks like 'buying' is actually just restricted stock units vesting or options exercises where they sell shares to cover taxes. Luna: So the key is to look at open-market purchases, where they're putting actual cash at risk. I've seen some studies that say a cluster of insider buying—multiple officers buying at once—tends to precede outperformance by 5 to 10 percent over the next six months. Lucas: Yeah, the academic research backs that up. A paper by Seyhun in the '80s showed that insider buying predicts returns, but the edge has narrowed as the market got more efficient. Still, in today's environment—with the S&P at record highs and small caps lagging—I think it's especially relevant. Luna: So give me a concrete example. What have you seen recently that stands out? Lucas: Well, I was looking at a mid-cap industrial company—I won't name it because it's not a household name—but the CEO bought $2 million worth of stock on the open market in late June, at around $45 per share. That was his first open-market purchase in over three years. And the CFO bought $500,000 the same week. Luna: That's a strong signal. Especially if they weren't buying during the uptrend. You'd think they'd be selling into strength, not buying into weakness. Lucas: Exactly. And the stock had fallen about 20 percent from its high on some earnings miss tied to supply chain issues. The insider buying suggested management thought the selloff was overdone. Since then, the stock is up about 12 percent, but it's still below the CEO's purchase price. Luna: So there might still be room. But how do you screen for these opportunities without getting lost in the data? Lucas: I use a simple three-step framework. First, filter for open-market purchases only—ignore any transaction marked 'M' for option exercises or 'A' for grants. Second, look for purchases that are at least 10 percent of the insider's total holdings, or a dollar amount that's material to their net worth. Third, check for multiple insiders buying within a 30-day window. Luna: That clusters idea is key. If it's just one person, it could be a pet project or ego. But when the CFO, the COO, and a director all buy within a couple weeks, that's a coordinated signal. Lucas: Right. And there's a great free tool—OpenInsider.com—that aggregates all these filings. You can sort by transaction size, see the percentage change in holdings, even see if insiders are buying after a price drop. It's a goldmine for the retail investor who's willing to do a little homework. Luna: One thing I always wonder: aren't insiders sometimes just buying to boost morale or signal to the market, even if the stock isn't actually cheap? Lucas: That's a real risk, especially with CEOs who have a big ego. But you can spot that by looking at their historical pattern. If they buy small amounts regularly regardless of price, it's probably just a routine. But if they've been silent for years and suddenly buy a big chunk after a sharp decline, that's different. Luna: And you also have to consider insider selling. I mean, if a CEO is buying $2 million but selling $20 million in the same quarter, that's not bullish. Lucas: Great point. You always want to look at the net number—total open-market purchases minus open-market sales. Some executives have pre-arranged trading plans, so a sale might not be bearish. But if you see consistent selling with no buying, that's a red flag. Luna: So let's apply this to the current market. With the S&P 500 up and small caps down, where are you seeing the most insider buying? Lucas: Actually, it's concentrated in small and mid-cap value stocks. The Russell 2000 is near 3,000, down about 10 percent from its high last year. A lot of these companies have solid balance sheets but are getting lumped in with the 'rising rates' bucket. Insider buying in that space has picked up notably in June. Luna: That makes sense. The selloff has been indiscriminate. If you can find a company with growing free cash flow and insider buying, you might have a real bargain. Lucas: Exactly. And that's the kind of stock picking we focus on here—finding mispriced assets with real catalysts. Insider buying is just one piece, but it's a piece that aligns your interests with management's. Luna: Speaking of alignment, it reminds me of something we talk about a lot on the network: if you value these conversations, a couple of dollars a month goes a long way to keeping them ad-free and independent. Lucas: Yeah, genuinely. A small contribution at buy me a coffee dot com slash fexingo helps us keep digging into these specific angles—whether it's insider filings or free cash flow analysis. It makes a real difference. Luna: And we appreciate everyone who already supports the show. Now, back to insider buying—one more thing I want to mention: the timing. Insiders have to report within two days, but sometimes they might buy weeks before the filing becomes public. Is that a problem? Lucas: It can be, but in practice, most filings are available within 24 hours. And the SEC has been pushing for faster disclosure. Still, you're not going to get the absolute first-mover advantage. But that's fine—the edge comes from identifying clusters and patterns, not from front-running a single trade. Luna: So for someone listening who wants to start using this today, what's the one thing they should do? Lucas: Set up a watchlist of companies you already know and like. Then check OpenInsider for those tickers every week. Look for any open-market purchase over $100,000 by a C-suite executive. If you see two or three in a month, do a deeper dive on the fundamentals. That's where the real stock picking begins. Luna: I like that. It's practical and keeps you focused on high-conviction ideas. Lucas: Exactly. And in a market where small caps are cheap and megacaps are expensive, insider buying might be the signal that points you toward the next hidden gem.