By James Porthouse
November 12th, 2024
BURLINGTON, ON
I have been publishing the “Top Five” lists in the Burlington Gazette for several months.
I described in part 1 of this series https://burlingtongazette.ca/insider-trading-explained/ that the insider data comes from www.sedi.ca
When an insider makes a trade the regulators require a person, from the insider’s company, to file or enter information about the trade at www.sedi.ca
Some companies are very punctual about their entries and some are not. SEDI records the date a transaction is filed and a person keys in the date the trade occurred. When looking for the top 5 the software starts by looking at the date the trade was filed and then it looks at the date the trade occurred, trades that occurred more than 7 days before the filing date are ignored.
Companies enter many different types of transactions into the SEDI database. The full list is here https://www.sedi.ca/sedi/new_help/english/public/Glossary/Nature_of_transaction_codes.htm
When reporting on the top 5, we only look at these two types, this post is open for comments, if you have other ideas please comment.
| 10 | Acquisition or disposition in the public market |
| 51 | Exercise of options |
Insiders sell for many reasons, are they cashing in their options to buy a new Ferrari, or are they expect the share price to decline? We can’t tell from the data when the Ferrari is being delivered or when the insider expects the share price to decline but this specific pattern is common.
know if the options were about to expire and become worthless. We don’t know if Mr. Sweeny suspects the share price will go down and it’s better to sell now than wait. We don’t know if Mr. Sweeny is buying a $15,000 car.
Let’s use John Doe as another example. John is employee number 5 at FicCo, a fictional corporation. To encourage John to work insane hours to help FicCo grow the company gives John stock options. In ten years the options will mature and John can purchase 10,000 shares from FicCo at the price of $1.00 a share. Today, shares in FicCo aren’t worth the paper they’re printed on. Fast forward ten years, John worked too many hours, he’s now divorced and friendless, but FicCo’s stock is worth $1,000 a share, and John has stock options worth just under $10,000,000.
The stock options encouraged John to work to increase the stock price, something shareholders wanted, but when John sold his shares, 10,000 new shares of FicCo’s stock came into the market diluting the value of the existing shares.
Usually, the dilutive effect is tiny but if a company is always issuing options and insiders are always selling the shares they get from those options, the share price may come down.
Summary
The algorithm looks at information filed on a specific day, ignores trades that took place more than 7 days ago, totals up the type 10 transactions (Acquisition or disposition in the public market) for each company that filed data, and selects the 5 companies with the highest dollar value of buying and the 5 with the highest dollar value of selling. The type 51 transactions (exercise of options) are shown in the report but are not used in the calculation.
The companies in the top 5 acquisitions section of the report may be new to you, do your research to determine if you are comfortable buying the company’s stock. AutoCanada is a great example of a company with insider buying in early August that promptly suffered a cyberattack in mid-August. When you see an insider buying at a small-cap cryptocurrency company that used to be a gold exploration company think twice before investing.
If you own a stock that shows up in the top 5 dispositions section, look for potential headwinds, consider a defensive action like placing a stop loss order, consider selling the stock, and consider doing nothing. This is not investment advice, consider does not mean do. The report is information only. Insider buying may mean a new board member is buying stock to have some skin in the game, and insider selling may mean the Ferrari is about to be delivered.
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