| | | Insider buys are one of those highly touted indicators I have come to regard as probably as harmful as it is helpful. For one thing, insiders buy for all sorts of reasons and these are not always easy to sort out. For another, insiders are often not all that smart or well-informed about the company, unless you are referring to obvious insider information like M&A news, positive trial results or contract wins, etc. And even there any sort of time-sensitive strategy will whipsaw as often as not. Really only the time I look at it is if there is a long-term trend (like most other things I look at): insider with a significant ownership stake and large, incremental buys over a course of months or years.
Same goes for buybacks. Instead of buying their own stock because it is undervalued or because they want to delist, companies are often buying stock either because they have no better economic use for the capital or, even worse, because they want to prop up the stock to ensure management meets bonus targets. The latter gets pretty crazy when you note (1) management's options increase in value when the stock goes up (2) management at more aggressive companies gets additional options/ PSUs based on TSR - total stock return. So it's like options on steroids. Combined, purchase of overpriced stock (particularly at peak cycle) and windfall bonuses are value destroying and often a bearish rather than bullish indicator for a stock. Here, I wanted objective evidence the stock is undervalued but this is not to cyclical/ long term reasons. I want the buyback to be significant (>10% of common and preferably much more). And I like to buy somewhere in the 25-50% implementation range if possible.
Buying on M&A speculation is not value investing IMO, but rather a weak form of risk arbitrage. It is also prone to bubbles. On the other hand, if you discover a company that is both objectively undervalued (historical, not comps) and strategically desirable, there's no reason the strategies can't overlap. This is not what most people are doing however. M&A premia (and the goodwill they create at erstwhile acquirers) tend to evaporate quickly which liquidity dries up. We've seen that happen twice in the last 12 months so there is reason to believe we are not out of the woods. |
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