CEOs are often sitting at the position where they have informational advantage, and are thus, tempted to purchase or sell shares of their company. They generally enter or exit the stocks ahead of events which provide them with substantial benefits. This is the main reason why retailers track the stocks which CEOs are buying.
Even though there have been instances in the US which qualify the mark if illegal insider trading. In most of the cases, the company insiders have bought the shares in advance.
CEOs Going After Illegal Forms of Insider Trading
In the previous month, Dutch soccer club AFC Ajax NV decided to suspend its CEO Alex Kroes. It said that it found “strong indications” pointing that executives were engaged in insider trading. Finally, club accused Kroes of purchasing over 17,000 shares of the club a week before the appointment.
In March month, SEC put allegations in a law suit on Andy Bechtolsheim. Andy is the billionaire co-founder of Sun Microsystems Inc. and Arista Networks Inc. It was alleged that Andy illegally traded on Cisco’s $2.6 billion offer focused to purchase Acacia Communications Inc. This comes after he learns regarding the deal beforehand.
While retail investors continue to track stocks which CEOs are buying, it not always illegal for CEOs to purchase to liquidate their company shares.
There are investor who believe that founders and CEOs need to have skin in the game. If there’s an executive out there purchasing shares of the company, it means he/she is quite optimistic about the growth prospects. But what should outsiders learn and benefit by focusing on CEOs buying their company shares? Is it possible for a retail investor to make money through tracking stocks which CEOs are buying?
Reasons behind purchases
Research paper titled“Have the benefits of CEO purchases been understated?” mentions that there is “little empirical evidence” which highlights reasons behind these purchases “apart from directly gaining from such a trade.”
Interestingly, it was believed that CEOs tend to accumulate their company shares and then they expose them to “idiosyncratic risk.” This is so because they want to increase their tenure.
Stocks which CEOs are buying deliver highest returns
Moving beyond the CEOs, focusing on what insiders do is helpful for investors. Research by Catalyst Capital Advisors mentions that researchers at Wharton, Harvard, and other top universities exhibit that insiders’ trades tend to outperform market indices on average.
This study mentioned that back-tested data related to insider trades between 2003 to 2010 exhibits that following insider trades easily perform the overall market performance.
Therefore, investing in the stocks which CEOs are buying has proved to be beneficial over the long-term.
1. Intrusion Inc.
The company is a cybersecurity company which is based out in Plano, Texas. It provides customers access to exclusive threat intelligence database which has historical data and known associations.
It has decided to acquire minority stake in Klever AI, a Houston, TX based artificial intelligence company. This will be an all-stock transaction.
The company released its financial results for 4Q and full year ended December 31, 2023. It saw improved full year EPS of $(0.57) per share in FY23 in comparison to $(0.82) per share in FY22. Revenue for FY23 came in at $5.6 Mn, exhibiting a fall of $1.9 Mn in comparison to FY22.
On April 22, the company’s CEO Scott Anthony lapped up ~585,748 shares of Intrusion Inc. at the price of $1.70 per share.
2. J B Hunt Transport Services Inc.
J.B. Hunt Transport Services, Inc. is American transportation and logistics company which is based out in Lowell, Arkansas. The company’s CEO John N. Roberts bought ~6,200 shares at the price of $161.06 per share. This transaction took place on 26th April. Since then, up until May 7, the stock has increased by ~3.3%. However, Roberts will be replaced by incoming CEO Shelley Simpson on July 1.
The company announced that its Board of Directors declared regular quarterly dividend of $ 0.43 per common share.
3. Cleveland-Cliffs Inc.
Cleveland-Cliffs Inc. is American steel manufacturer which is based out in Cleveland, Ohio. The company specializes in mining, beneficiation, and pelletizing of iron ore and steelmaking, which includes stamping and tooling.
On May 1, the company’s CEO Lourenco Goncalves purchased ~60,000 shares at the cost of $16.76 per share. Since then, this stock went up by ~5%. Total worth of the transaction came in at ~$1 million. CEO purchased the stock after the company posted quarterly results on April 22.
Read Also: