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Business News/ Market / Mark-to-market/  Copying insiders may pay off for investors
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Copying insiders may pay off for investors

Insiders in a company have an information advantage. Does it make sense, then, to simply imitate what they do in terms of stock purchases and sales

Graphic: Naveen Kumar Saini/MintPremium
Graphic: Naveen Kumar Saini/Mint

Mumbai: Insiders in a company have an information advantage. Does it make sense, then, to simply imitate what they do in terms of stock purchases and sales, rather than spend precious time researching companies?

Analysts at Ambit Capital Pvt. Ltd believe it makes immense sense. They studied trading data of insiders for the past one year and concluded that investors could have outperformed the market by 35% (on an annualized basis) by simply buying when insiders of prominent companies bought stock.

You wouldn’t have the same luck imitating the sellers, though, as returns of these stocks were broadly in line with the market.

The table shows performance of shares seeing insider buying and selling in the immediately following three-month period. This is then compared with returns of the S&P BSE 200 index. Companies shortlisted for the study are those where the number of shares bought or sold is large vis-à-vis the firm’s share capital.

Gaurav Mehta, vice-president (institutional equities) at Ambit Capital, says that this trend has been visible even in the past: “Even historically, we have observed that a portfolio consisting of firms where insiders were net buyers in a particular month outperforms the broader market by more than 3.8% if held for the next three months."

This makes sense intuitively—insiders have an information advantage over others, and also have a far better understanding of the underlying business fundamentals. Typically, when insiders buy, they are confident about the business prospects of the firm, especially in the case of a promoter. But having said this, one cannot blindly buy whenever an insider buys. Investors should use this data as one among many inputs, if at all.

Also note that trades done by company insiders are reported to stock exchanges, as required by the Securities and Exchange Board of India’s regulations.

According to data compiled by Mint, out of 11 relatively big insider buying transactions in June, only five stocks have outperformed the market in the current quarter. These companies are: Century Plyboards (India) Ltd, Essel Propack Ltd, Godrej Consumer Products Ltd, Tree House Education Accessories Ltd and Tata Chemicals Ltd. Not surprisingly, shares of Bhushan Steel Ltd plummeted even after an insider purchased shares. Also, it must be kept in mind that while there may be outliers, there is no “informational value" in insider selling. If an insider is selling shares, it does not necessarily send a negative signal. He or she could very well be selling for personal reasons such as raising funds for buying a house.

Ambareesh Baliga, an independent market analyst says, however, that if a promoter is selling, for instance in the case of Jaiprakash Associates Ltd (JPA), it may not be a good sign. He says it indicates that the promoter is in financial difficulty and is not able to raise money. Jaypee Infra Ventures, through which the promoter group holds a large part of its holding in JPA, sold shares at the beginning of this month, when JPA shares were trading in the range of 46-48. The JPA stock is currently trading at about 36.

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Published: 23 Sep 2014, 12:24 AM IST
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