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New Model Portfolios: Insider Buys and Sells

January 05, 2011

After we created the model portfolios of overvalued stocks, we also created a group of model portfolios based on insider buys and sells. These portfolios are:

Insider Strategies (Long)

Top 25 CEO Buys

Top 25 CFO Buys

Top 25 Insider Cluster Buys

Insider Strategies (Short)

Top 25 CEO Sales

Top 25 CFO Sales

Top 25 Insider Cluster Sales

The portfolios are divided into long strategies and short strategies. The long strategies are the stocks that have been bought by their company executives and/or directors. The short strategies are the ones that have been sold. All portfolios contain the 25 stocks that have the largest numbers of shares bought or sold over the past 3 months. We only include the stocks that have the market cap of at least $100 million and the price of higher than $1. Also we only consider open market transactions at the market prices. The portfolios will have a 12-month holding period, and will be rebalanced once a year during the New Year holidays.

As an example, the model portfolio of Top 25 CEO Buys consists of the 25 stocks that have been bought by their company CEOs for the highest number of shares during the past 3 months. The portfolio starts with $100,000. The fund is equally distributed among the 25 stocks.

The portfolio of Top 25 Insider Cluster Buys consists of the stocks that have been bought by the highest numbers of company executive and directors. If the number of unique insiders are the same, the number of shares bought is used for the ranking.

During the rebalance next year, we will use the new 25 stocks to replace the current ones. It is possible some stocks will stay, if the CEO continues to buy at large amount.

The model portfolio of Top 25 CEO Buys is in the opposite of Top 25 CEO Sales, which are composed of the 25 stocks that have the highest number of CEO sales. The same applies for CFO buys/sales and insider cluster buys/sales.

Previous research on insider trading reveals that CEO buys outperform the market average by wide margins, and CEO sales underperform the market. We will observe and compare the future performances of these portfolios.

As we discussed in the model portfolios of overvalued stocks, the portfolio of CEO sales will be able to serve as the hedge for CEO buys. With this hedge, it is possible to run the portfolio which is neutral to market performance. The portfolio performance will be dependent on the difference in the performances of the long positions and the short positions.

Please visit Insider Buys for the current insider trading list, including CEO Buys/Sales, CFO Buys/Sales, Insider Cluster Buy/Sales, Double Buys/Sales, Triple Buys/Sales.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.9/5 (16 votes)



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