We are hard pressed to find much opportunistic in this week’s insider buying reports unless you think 20,000 newly acquired shares of Lovesac by the Chairman might do anything to arrest this falling knife.   Then again it wouldn’t take much to enact a counter trend rally.  LOVE is exactly that kind of small cap neglected name is making giant one day moves in this current state of the broader rally.  Their sectional sofa line, affectionally named Sactionals might just be the product that moves the stock higher.  The company reported 40% revenue growth on Jan 13th,  although yet unprofitable.

One of the things that could derail this bull run is rising interest rates.  Barron’s last week cited it as a potential rally ender, Beware this Looming Stock Market Killer. Clearly the economy is humming and the difference between overheating and humming is getting closer and closer. The Fed has turned 360 and is now worried about deflation, not inflation.  That almost seems nonsensical when houses are going up in price every year, food, and health care costs rising, and a tight job market.  A market driven shift in the long bond might ( that part of the curve that they don’t directly control) might catch them by surprise and markets.

Rising rates from a booming economy might not be fuel for a market advance but bank stocks will welcome a change in the Fed’s monetary stance.  Maybe that’s what Director Melody Hobson was thinking when she bought 14,600 shares of JP Morgan (JPM) last week near an all-time high at $136.39.  Normally insiders buy their stock when it is beaten upon or sold off on news items that they think will be temporary. When they buy at all time highs, especially after just recently purchasing $2M at $124.65 two months ago.  It’s hard to look at that as anything but bullish for longer term investors.  If there is a tick up in rates, it will look downright prescient.  Not be ignored is that several insiders including the CFO have elevated their planned selling programs.

Insiders sell stock for many reasons, but they generally buy for just one – to make money. THE INSIDERS FUND invests in companies at or near prices that management has been willing to invest significant amounts of their own money in.  After all, who knows a business better than the people running it?  You’ve always heard the best information is inside information.  This is as close to “insider information” that an ordinary investor is likely to see- and it’s entirely legal.  Officers, directors, and 10% owners are required to inform the public through a Form 4 Filing any transaction, buy, sell, exercise, or any other with 48 hours of doing so. This info is available for free from the SEC’s Web site, Edgar, although we subscribe to the Washington Service as they provide a way to manage and make sense of the vast realms of data.

As a rule, we only look at material amounts of money, $200 thousand or more, as anything less could just be window dressing. The bar is different from selling because the natural state of management is to be sellers. This is because most companies provide significant amounts of management compensation packages as stock. Therefore, with selling, we analyze for unusual patterns, such as insiders selling 25 percent or more of their holdings or multiple insiders selling near 52-week lows. Another red flag is large planned sale programs that start without warning. Unfortunately, the public information disclosure requirements about these programs referred to as Rule 10b5-1 is horrendously poor.  I also generally ignore 10 percent shareholders as they tend to be OPM (other people’s money) and perhaps not the smart money we are trying to read the tea leaves on.

Of course insiders can also be wrong about their Company’s prospects. They can easily be wrong about how much others will value them, and in many cases, maybe most cases have no more idea what the future may hold than  you or I. In short, you can lose money following them.  We have and we curse aloud, what were they thinking!  Needless to say, past good fortune is no guarantee of future success.  We may own positions, long or short, in any of these names and are under no obligation to disclose that. We welcome your comments on our analysis.

This blog is solely for educational purposes and the author’s own amusement.  Investing with The Insiders Fund is for qualified investors and by Prospectus only. Nothing herein should be construed otherwise.  To learn more about our strategy, visit our website. If you would like to hear more about how you can get involved with the Insiders Fund, please schedule some time on my calendar.

Prosperous Trading,

Harvey Sax