Just wanted to update the partners and interested parties on recent events and market turmoil. As of yesterday the Fund was up about 2.88% for the month. These are unofficial numbers but highly reliable nonetheless. After today, I expect that gain will be gone.  The market is in the grips of a psychological panic caused by the coronavirus.  It doesn’t matter if this is justified or not, it just is.

Particularly hard hit have been airlines which was our highest exposure as an industry group.  We have been reducing this exposure and as of the time of writing, we have about a 5% exposure to just one airline, American. It seems like a mistake to reduce this exposure any more.  An American Airlines director bought $628k worth of American at $$25.14 yesterday, 2/24/20.

The Fund makes heavily concentrated investments and when they go right, they make a big difference.  When they go wrong, in the short term or even long term it is painful.  Our largest exposure is to MoneyGram, a $150 million market cap company, that I believe is central to a sea change event in the way we handle cash on an international scale. Much has been written about how cash is a dying asset class. This may be true but I believe it’s going to be a long death and a good future for MoneyGram.

In the last few months the company has completely transformed itself. Ripple (3rd largest crypto currency company) bought 20% of the company at twice the current price.  Brinks, the #1 position company in the cash handling business, just announced they bought 5% on the open market and believes there is a huge opportunity in moving cash to digital and back to cash. They plan on doing big things with MoneyGram but their plans are in early stages. I can confidently say there is no company in the world better positioned to participate in this secular revolution.  If we had new money, we’d buy more at its current $2.10 price.  As it is, we limit our exposure by company and by sector. With MoneyGram we had initially about a 7.3% exposure and don’t intend to increase that.  If this idea works, it will be plenty.   MoneyGram could easily rise to $19 or more.  That’s the price Ant Financial offered in 2017 for the Company but was blocked by the US government. Ant Financial was the money management/payment arm of Ali Baba but now a stand alone financial giant.  It could easily be said to be the most advanced digital payment company in the world.  I believe Ant sees this revolution happening, especially in the emerging economies around the world.

Other investments have significant recent insider buying, like Bunge and Medtronic. Now that there is a trade deal, expect agricultural purchases from China to pick up.  People still eat even if they don’t fly on airplanes or attend rock concerts or Disney World.  Macerich, a mall based REIT with large insider buying, pays over 13%.  People might stop going to malls to avoid human contact but that won’t leave tenants off the hook. If this is a permanent change, then we have a lot more problems than low occupancy rates in malls.  Malls and shopping centers in good locations, like Macerich, will be repurposed as needed. Tenants may come and go but real estate doesn’t move. For example, Google just took over space in one of their LA properties.
US Concrete and to a lesser extent, Martin Marietta Minerals, have had massive insider buying.  We need an infrastructure program and you can be assured this is on both Democratic and Republican politician’s minds.  There is nothing more popular, or in this case direly needed, when the economy slows down from an external event such as the coronavirus.
We own a smallish nerve repair company, AxoGen that is suffering today after earnings.  They have no debt and have been growing over 40% per year for 4 years, albeit from a small base.  We have about a 4.4% position in this name and could buy some more if insiders step up again.  Repairing nerve damage in an aging population seems like a good opportunity to me. The CEO bought $1million at $13.50 on the open market back in August 2019. It closed today at $12.12.
We have smallish positions in a couple dozen more names.  The Fund has about 20% in cash, 80% long investments. Insiders are not immune from macro events but one thing I can say with a high degree of confidence.  Significant market corrections almost always end with a wave of insider buying.  That makes sense as sell-offs are created by lack of confidence.  When insiders step up, it restores confidence. It’s that simple. We will be ready. As for the coronavirus, no one will be even talking about it this summer.  All the worry will be about the upcoming election. If you don’t believe me, rely on this fact.  There wasn’t even enough market demand to develop a vaccine for SARS as it all but disappeared on its own.  If you’ve been on the fence waiting for the big one, this might be it.  New investments for March must be in our bank accounts by the first. As always, you can reach out to me at any time.

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.

Harvey Sax
Insomniac Hedge Fund Guy