Insiders of financial companies bought more stock in August than in any month in the last three years.

By Megan Barnett
September 2, 2011

By Joshua Steiner and Allison Kaptur, Hedgeye

Bank stocks are getting clobbered today following news that the U.S. plans to bring a lawsuit against the major banks for their marketing of mortgage-backed securities during the housing boom. That may not bode well for many insiders who scooped up shares at a fevered pace last month.

Indeed, insiders are buying, but they’ve generally had a mixed track record on this front. While our studies have shown that insider buying results in a 15.8% one-year absolute return, the batting average is subpar at only 42.8%. In other words, more than half of the time, insiders are down one year later, but because of the asymmetric (i.e. geometric) nature of the setup the average return is still quite positive.

In the chart below, we take a look at the month of August as compared with prior months and we have the financial ETF XLF price chart overlaid on the second y-axis. Clearly, insiders bullishness in August 2008 and November 2008 proved quite early, while their bullishness in January – March 2009 was spot-on.

Our monthly Financials Insider Transaction Monitor measures the breadth of corporate insider buying and selling during the past month. We’ve analyzed this data historically and have found that different levels of insider selling correspond to different expected price performance and hit ratios over the following 12 months. Details of this analysis can be found below.

Notable insider buying took place at:

Glacier Bancorp GBCI , MFA Financial MFA , Synovus Financial SNV , Huntington Bancshares HBAN , Radiun RDN , Assured Guaranty AGO , Regions RF , JP Morgan JPM , CIT CIT , Nasdaq NDAQ  and Morgan Stanley MS .

Notable insider selling occurred at:

Mastercard MA , Cash America CSH , EZ Corp (EZPW), World Acceptance Corp WRLD , Westamerica Bancorp WABC .

Notable for their lack of insider buying were:

Bank of America BAC ,Citigroup (C) and Goldman Sachs GS .

While the expected absolute returns are positive 15.8% 12 months out following an open market insider buying transaction, it’s very important to note the much lower hit ratio or batting average associated with insider buying transactions relative to insider selling transactions. That is to say, there’s a heavy element of geometric distortion in the outcome here. Only 42.8% of stocks rise over 12 months following an insider purchase transaction. This means that those that rise in value do so by far more than those that fall in value. As such, we treat open market insider buying as a less reliable overall signal relative to open market insider selling.

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