Shrewd investors have known it for a long time: Company insiders have an information advantage, so tracking their stock purchases can point you toward investment profits. Even academics are on board; consider the following observations, which I've lifted from three different studies:
- "For the period 1975 to 1989, the aggregate net number of purchases and sales by corporate insiders in their own firms predicts up to 60% of the variation in one-year-ahead aggregate stock returns." (1992)
- "We find that insider purchases earn abnormal returns of more than 6% per year." (2003)
- "[I]nsider purchases convey information about future earnings, and investors should treat these trades as credible signals when forming earnings forecasts and equity valuations." (2005)
But if all this is so well-known, surely the market prices this information in and ordinary shareholders have nothing to gain. Not so. "The market basically ignores this information when it is reported," writes one academic. In the latest in this series, let's find out whether the market is thumbing its nose at opportunity by ignoring the latest insider stock purchase at specialty glass manufacturer Corning
Who, what, and how much?
John Canning, one of Corning's directors, recently paid $15.40 per share for 30,000 shares, for a total investment of $462,000.
What is this insider's prior record?
Here are two of his prior non-option-related share purchases from the past several years:
Date/ Stock/ Purchase
Annualized Stock Performance* to Oct. 28, 2011
Performance Relative to Its Sector**
Performance Relative to S&P 500 Index
20,000 shares at $19.16
5,000 shares at $76.08
Source: S&P Capital IQ, S&P Indices, and author's calculations. *On a total return basis. **As measured by the S&P 500 sector index, of which the stock is a member.
Canning, who co-founded a large Chicago private equity firm, ought to have a firm grasp on assessing business values. Despite this, these two purchases suggest that Canning's instincts are awful when it comes to publicly traded companies. Both Corning and Exelon have underperformed their indexes by a wide margin since he bought the shares. A couple of factors do mitigate this record, however. First, two purchases make for a pretty small sample. Second, both time frames are a bit short to evaluate stock performance.
Does the stock look cheap?
Just how cheap (or expensive) are the shares right now? Based on price-to-earnings ratios, Corning shares sit at the bottom of a group of four of its peers:
Source: S&P Capital IQ.
In addition, Corning's price-to-earnings ratio is in the bottom quintile relative to its industry peers, the companies in the S&P 500, and its own five-year history.
Is this a buy signal?
This insider buy provides limited information, but it is corroborated by Corning's relative valuation and the company's recently announced share buyback program. Corning shares look very attractive right now; you can follow the stock and all the developments affecting the company using our free application My Watchlist:
Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. Motley Fool newsletter services have recommended buying shares of Corning, Exelon, and Riverbed Technology; writing puts in Riverbed Technology; and creating a write covered strangle position in Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.