What happened

Investors in Party City Holdco (NYSE:PRTY) are having a bit of a celebration today, enjoying a 17% run-up in the party supply company's shares through 11:30 a.m. EDT.

It's not hard to figure out why. Friday after close of trading, Party City revealed in an SEC filing that its independent director and chair of the board of directors, Norman Matthews, has purchased 250,000 shares of the company on the open market, at prices averaging $2 a share.  

Many balloons against a blue sky

Image source: Getty Images.

So what

SEC filings show that with this purchase, Matthews now owns some 748,084 shares of Party City stock. In other words, in one fell swoop, he just increased his ownership stake in the company by more than 50%.  

That seems pretty propitious. When you consider that Party City's business model centers on providing the materials needed to throw parties (an activity generally discouraged by the government in the midst of a pandemic), that sales at the company dropped 55% last quarter, and that Party City stock is down 57% over the past year, any sign of optimism among insiders seems surprising -- and a 50% increase in ownership especially so.

Now what

But here's the thing: As insider-trading guru George Muzea once pointed out in The Vital Few vs. the Trivial Many, it's actually "normal insider behavior ... to buy into price weakness," just as it is normal behavior for the rest of us to try to catch falling knives.

But what Muzea says we should really be doing is this: "What you want to look for are new purchases where insiders are buying as the stock goes up, as this implies more good news is coming." In other words, while it's great to see the chairman buying shares of Party City before today's run-up, it will be even more interesting to see if he continues to buy after the run-up.

If you see that happen, then (and only then) will you be looking at a clear-cut buy signal.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.