It seems only logical that trades by a company’s executives would provide a clue to that company’s outlook.
But if you need academic studies to prove it, there are plenty. The seminal work was done 23 years ago by Nejat Seyhun, a professor of finance at the University of Michigan. His conclusion – that insiders beat the market averages when they trade -- has been confirmed my numerous studies since then.
That’s why, four times a year, I devote this column to insider buys and sells that look significant to me.
Here are two companies with recent insider buys, and one with a sell.
At Forward Air Corp. (FWRD, Financial), a slew of insiders purchased shares in August. One of them was Thomas Schmitt, the chief executive officer. Schmitt bought 16,050 shares in mid-August, spending just over $1 million. He now owns about $5 million worth of the shares in all.
In addition to Schmitt, nine directors and three other executives bought shares.
The insider buys followed a 25% drop in the stock on Aug. 11, when Wall Street analysts took a dim view of the company’s acquisition of Omni Logistics. The price was $3.2 billion, and Forward Air’s revenue in 2022 was just under $2 billion.
Since the demonstration of faith by insiders, the stock has recovered modestly. It is trading at just under $70 a share, compared to more than $100 a share for most of this year preceding the hefty acquisition.
Forward Air, based in Greeneville, Tennessee, is a logistics company that strives to be “asset light.” That means that it does not own most of the planes and trucks it uses for deliveries, but rather leases them or uses subcontractors.
The company has been profitable in each of the past 15 years, with the profit level varying from just OK to extremely good. Return on stockholders’ equity has been in my preferred zone – above 15% -- in nine of those 15 years.
The stock sells for 12 times earnings, which I consider an alluring valuation.
At Fox Corp. (FOX, Financial), famous as the bastion of conservative and Republican causes, CEO Lachlan Murdoch paid $4.7 million to buy 141,367 shares of Fox stock, which he sold the same day to the Murdoch family trust.
The family trust owns 39.6% of Fox Corp. It also owns most of New Corp., which in turn owns the Wall Street Journal, New York Post and the Sun in Britain. Analysts peg the trust’s value at about $17 billion.
Media czar Rupert Murdoch is the family patriarch, and owns 40% of the trust. Lachlan is his son, one of six children from three marriages. He owns 10% of the family trust, and directly owns about $27 million of Fox stock.
Although I disagree with Fox’s ideology, I like the stock’s valuations –- 14 times earnings, 1.1 times revenue and 1.5 times book value (corporate net worth per share).
Insiders frequently sell shares here. Presumably, their cups are refilled by options grants. What caught my eye is that selling volume in August was the highest since November 2021.
Nine insiders sold shares on Sept. 5, and all of them retained far more shares than they sold. The executives lightening up included Amit Agarwal, president, Adam Blitzer, chief operating officer, and Alexis Le-quoc, chief technology officer.
The stock, by my lights, is expensive. It trades at 60 times earnings, 16 times revenue and 19 times book value.
This is the 67th column I have written about trades by corporate executives in their own companies’ stock. I’m able to tabulate 12-month performance for 57 of them – all through from February 1999 through a year ago.
Stocks with insider buys that I recommended have beaten the Standard & Poor’s 500 Total Return Index by 1.23 percentage points in 12 months, on average. Stocks with insider buys that I said to avoid have underperformed the index by 24.88 percentage points.
Stocks where I noted buying but made no comment, or an ambiguous comment, have beaten the index by 12.22 percentage points.
Stocks where I noted executives’ selling have underperformed by 1.37 percent points.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. He or his clients may own or trade securities discussed in this column. He can be reached at [email protected].