#302: The One Metric You Need to Find Multibagger Stocks

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0:57Mike:Go to your happy price. Priceline. Not all great stocks have high insider ownership, but there is a big correlation. It's proven out to be that businesses with skin in the game, with CEOs who own a large portion of the company and have a long-term vision, fare better than those that don't. And then it paired well with just a couple of notable insider buys that came up from the insider bot, in particular one. Don't say them yet. Don't say them. Okay, okay. I'll save it. Save it.

1:24Emmet:Save it.

1:31Emmet:Welcome to Stock Club, the podcast where we find and discuss stocks that anyone can buy, many of which we believe will go on to grow your wealth. You're in for a treat with today's episode because we're going to tear apart one of the most bullish signals that you can find for an investment. A bullish signal is something you can see that indicates a stock is going to go up. In fact, this is the most bullish signal as measured. on something that I will discuss soon. And Mike and I will discuss a few recent examples, and I'm going to tell you how to get that information to your phone the minute it is reported to the stock exchange as per the law dictates.

2:16Emmet:But before all that, it's St. Patrick's weekend here in Ireland, well, everywhere, and we are an Irish company of friends who are terribly proud to be Irish. So as we do every year, we have an under the desk Paddy's Day deal. If you're interested in joining any of our services, email frank at mywallstreet.com. That's M-Y-W-A-L-L-S-T.com. And if he's in a good mood, you might get a little bit of the look of the Irish. Now wait there, mike before i bring you in on monday just of this week we passed 13 000 subscribers on youtube which means something something is happening over there as it was only 6 000 at the start of february and by all accounts we're barreling towards 20 000 youtube subscribers so i'd like to thank you if you're one of them indeed and thanks also to our spotify and apple subscribers which is also growing um so please do subscribe if you have not done so already because it really does help us in a small way but a very appreciated way mike how are you doing this week i'm good i'm good yeah

3:33Mike:back from my holidays i always laugh i feel like anytime i go on holiday something happens yeah so i think it was like friday and i checked the news and the netflix deal fell through and paramount won out and i was like oh that's that's not too bad that's a normal thing and then i think the day later it was like world war three and by the time we're back on the by the time we're back on the pod it's already over according to trump yeah which is funny like as in i always harken back to um i mentioned this on the pod so many times i've with bill mann and the scoreboards the s &p 5 is trump scoreboard and he cares about the scoreboard yes and you and you see like as in when he does something and then the market reacts he kind of has to go fix it a little bit every time do you know what i mean it's mad yeah yeah and like as investors i think it does put us in a in a better place to see a president that is that focused in on this one metric that obviously oh

4:25Emmet:yeah helps us there's never been a bigger capitalist i don't know maybe george washington i don't know enough about his history but the ultimate capitals reagan perhaps but i think capital success if you measure success by dollars in the bank are wealth accumulated pretty sure trump would be number one mike we've bits of housekeeping that i want to just get off my chest the first is i'd like to do a shout out to three listeners who in some way managed to get messages of support and kindness to me in recent weeks and i just wanted to reciprocate first up two young men who are rising stars i understand and who are destined for greatness so thank you Rory O 'Brien and Tom North for the privilege of having your attention and also thank you to Mark Buckley who wrote me a lovely note well wrote in to us but it landed in my inbox it was forwarded to me and I even saved a photo of it to my reel for the days I need to power boost my belief so thank you Mark for that okay Mike uh we said we would randomly select a name for anyone who subscribed to our stock of the month offer two weeks ago to receive one year of horizon completely free and as witnessed by you this morning i uploaded all the names of those who subscribed to chat gpt and i said randomly pick one of these names which was the best i could think of as a random selector we have that on record folks so if you need an independent adjudicator please write in to we don't read this at mywallstreet.com but the winner and it was genuinely randomly selected is kanwaljeet banga kanwaljeet banga delighted to welcome you to horizon for the year ahead okay mike that's all the stuff this week i think we're talking about insider buying

6:26Mike:yeah yeah i thought it was a good episode i just we talked about it loads of times and you mentioned in the intro kind of it's one of the key bullish signals um you've done a lot of research into the topic but there was just an awful lot of notable buys so as you know you kind of teased already we have our own insider bot which kind of highlights highlights within the parameters of what we set notable insider buys depending on who bought it the level of purchase the type of company etc etc And I thought it would be interesting to go through them, to go through why it is such a bullish signal, why insider ownership is such a bullish kind of component of a great stock.

7:08Mike:Not all great stocks have high insider ownership, but there is a big correlation. It's proven out to be that businesses with skin in the game, with CEOs who own a large portion of the company and have a long-term vision fare better than those that don't. Yeah. And then it paired well with just a couple of notable insider buys that came up from the insider bot in particular one. Don't say them yet. Don't say them. Okay. Okay. I'll save it. Save it.

7:33Emmet:Save it. Can I go out academic on it for a minute, Mike?

7:36Mike:This is the perfect setup because I think you've gone into this heavily in the past and there is a sweet spot, if you will.

7:44Emmet:Yeah. And it makes so much sense. I mean, when you see someone inside a company empty their piggy bank to buy shares in the company in which they're working, you know they're acting on an insight that we outside of that company are not privy to. And there's been tons of studies on this particular subject. But the one that is most lauded, I would imagine, is a book called Investment Intelligence from Insider Trading. And it's by a guy called H. Nayat Sehun. And this book is effectively a recipe book. It's the here's what you look for when there's an insider buy, because just any old insider buying any amount of shares, as your logic would dictate, is not really a formula.

8:31Emmet:What we want is a formula. So this is a well-known academic book that studies decades of insider trading data to determine what insider activity actually predicts future stock performance. um i don't know uh if it's the only book dedicated to this subject um i doubt it but it's the only one i've read 100 and i've read it a couple of times to go back and revisit uh my understanding and make sure my understanding is correct and there's a few main conclusions from the book which i'm just going to go straight to the bottom line and i do hope i'm not depriving Nayat Sehun of a few sales because I'm about to spoil it.

9:15Emmet:So apologies, Professor Sehun, if you're listening. So the main conclusions from the book are number one, senior executive trades matter more. So a CEO trade is the most informative. When you see the CEO buy shares in the company, she or he is running in that company, followed by other officers such as the CFO and the COO and then board members they're further down the ladder that is the most bullish signal so the most senior person at that company's activity is the most information laden and by the way an insider is a director or an officer or somebody who works in the company it makes sense they're inside the closed door they know what's happening up there as well is it someone who owns more than 10 % that's yeah that's true as well yeah that is correct so if you own if you own more than 10 %

10:08Mike:of the company i hope you know a lot more than the average investor out there that is that is correct

10:13Emmet:but a 10 shareholder generally will know less than the ceo no no for ceos so you're absolutely right so the the waterfall of knowledge up at the top of the pyramid and the most bullish signal is the ceo so that's the first thing we put in our equation we want to see ceos and i would argue cfos cfos are CEOs in robot mode.

10:42Mike:We're talking about the future and all the CFO is doing is modeling out future revenue, future profits, all the rest. If they are very bullish and they're putting their own hard-earned cash into the company, that's telling a lot. I think CFOs definitely go up there as well.

10:57Emmet:Oh, big time. You know it. And generally, if a CEO has to stand out of the business for any reason whatsoever for a period of time, the CFO has given the steering wheel. And that says that kind of illustrates the point. Okay, so the second signal that is documented and studied in the book is that insider buying is far, far more predictive than insider selling. And yeah, so buying basically only indicates one thing. I'd argue two things, but let me just stick with the happy path. It signals that the buyer believes that this asset, the shares in the company which works, are undervalued. However, selling happens for any number of reasons.

11:43Emmet:Diversification, or paying a tax bill, or some kind of liquidity event. Like I know a ton of entrepreneurs in Ireland and in the UK and even in America who are worth small fortunes living in the same house, driving the same car, eating at the same restaurants that they did before they created this so-called wealth. Not to say there's anything wrong with your first home. Your first home is as good as your last. And that's that. It's about the happiness inside. But generally, we start with a modest home. And I know people who have, on paper, created hundreds of millions of euro and dollars of paper worth in their own life, still kind of doing it the way they did when they were 27.

12:27Emmet:So taking some money off the table, as it's affectionately called, I'm going to take some money off the table, is just natural and normal. I mean, we're only here on this little planet in this mortal coil for eight or nine decades, if we have a good innings. And, you know, most entrepreneurs don't have access to any money before four or five of those 10 year lots have passed. So a sell event is just you can't interpret anything. And that isn't my opinion. That is comprehensively documented in the book, whereas a buy signal is way more bullish. Now, the second thing I alluded to earlier, there are virtue buys, virtue signaling, where you see a CEO buy a million dollars worth.

13:11Emmet:And if they're worth billions of dollars, it's literally they're not doing it to create wealth. They're doing to show, hey, look, I'm buying shares in the company that I'm running.

13:20Mike:We're going to get into that as well, because I've kind of highlighted a few recent ones and some of them definitely fall into that category.

13:27Emmet:Oh, I'm looking forward to that. I don't know what you're going to say, because I haven't seen those. um i know you've been looking more closely than me so the third sorry just before you get on to

13:36Mike:the third i wanted to touch on the selling as well because yeah i believe that this is sometimes misconstrued misconstrued as a negative uh signal by a lot of people because they see insider selling and it goes with say downward momentum they put two and two together and get five whereas an awful lot especially founders will have what's called a 10 10 b 5 1 um oh you have paperwork nerd but a bit but essentially what it is is it's just like i'm gonna sell x amount of shares every month on this schedule within these time frames within these uh pricing kind of uh pricing ranges as well and so unless you're like really tuned into what is an automatic sell what is like x what is y maybe his daughter's getting married uh you know whatever it is it's it feeding into what you're already saying of not to take a sell too seriously especially when you know they could own 20 of the company it might look like a big deal when they're selling 100 million dollars worth of shares but it could be absolutely nothing in the grand scheme of things what was the name of that flute who run

14:43Emmet:who used to run gopro he was paid more in a year than uh bob eiger the ceo of disney like the body camera company gopro and and that the we're gonna have flying drones company that didn't happen and he paid himself and it's time to be corrected he might be a flute but i'm pretty sure he sold 147 million dollars worth of shares one year while we were all getting excited about gopro's opportunity which wasn't a good look so i consider that a signal but um your man uh spiegel at snapchat

15:17Mike:as well i just snap now he yeah pays himself an incredible wage um yeah in the form of shares which he then sells while the stock is trading sideways basically so yeah i don't know greed is

15:30Emmet:a is a funny old beast uh not to say any of these people are greedy so the third signal uh number one as we said the more senior the individual the more information laden number two insider buying is far more predictive than insider selling. Number three is all about the context. And insider trades combined with recent price movements contain more predictive power than either signal alone. So in plain English, if the CEO buys shares at a meaningful level, which I'll describe in a moment, while shares are moving up, it's a very bullish signal. So if you see a CEO and she's bailed in a pile of money to buy shares in the company in which she's running or founded, while those shares are already on the way up, we've really got herself a green light.

16:25Emmet:Now, trade size. Number four is the trade size matters. This is the one element of the book that I was always most uncomfortable with. and what the book says is that medium what what he says describes as medium-sized insider purchases which is roughly between 10 ,000 and 100 ,000 shares historically contained more of a bullish strong signal and this one always left me uncomfortable because as I said I felt a dollar amount was more important or a percentage increase in their existing position was more important like you're like 10 000 shares but what if it's only a penny a pop or what if it's a thousand dollars a share like it didn't for me make sense this is probably the scientists coming through of this is what the

17:19Mike:data shows without i know diving in too deep but yeah yeah that totally grated with me i mean you're

17:26Emmet:right i started my life on the physical sciences which is all about measuring stuff and understanding quantums and this to me never sat well but it's proven with data and according to sehun 10 000 to 100 000 shares literally units is the sweet spot so put it there whether you like it or not that's what the book says folks now there's more there's more there's four signals for you but the book actually starts to refine it a bit and goes okay so there's the there's the ingredients you need for the recipe but you still need to understand what to do with the ingredients and i'm going to tell you what that is so clusters of insider buying matter far more than single purchases so one insider buying shares is good it's interesting but multiple insiders buying around the same time is statistically proven as powerful because very seldom do insiders collude to hey let's virtue virtue signal at the cost of our kids yacht you know like it's they they when you have several insiders buying um that is a very very powerful signal and say unfound that when several executives independently bought shares within a short period future returns were meaningfully higher because insiders have different information silos inside the company if you're a chief technical officer apart from going in to a few meetings with your peers that the chief human h hrd human hr director human relations director is that the hrd um the coo CFO, CAO, CBO, all the other CEOs.

19:14Emmet:If you're the CTO, 99 % of your time is thinking about the technology of the organization in which you work. You go to the COO and 99 % of their time is on the operations of the entire house. And so it continues. Everyone is working in a silo, but when several of them buy simultaneously, it suggests the signal isn't just personal optimism. it reflects a broad internal confidence about the business that's been discussed by the board. They can see this thing coming and I'm pretty sure in the examples, I can guess one of the examples you've got on your sheet there, Mike, although we haven't discussed it.

19:53Emmet:But let's go there in a minute. So that's why loads of quant strategies focus on cluster buying. So insiders are best at identifying when a stock is deeply undervalued. They are not great market timers in general these are people are not professional stock market folks they're not in the sport of stock investing or you know they're not necessarily at the sport of stock investing um but they are very good at buying when their company is extremely cheap because they have as they say in the movie industry they can cut a wide shot and see things coming and say and found insider buying tends to spike after a couple of things large price declines bad news cycles periods of market pessimism you could guess all of these and those purchases often proceed longer term rebounds now before i shut up mike in other words insiders behave a bit like value investors they buy when sentiment is terrible so let me tell you or hit you with a bonus insight which is the strongest insider signal ever historically and it is when the ceo buys after a big stock decline and i'm i'm almost certain you're going to have an example of that so when the person with the most information and the most reputational risk buys after bad news it's very often a strong confidence signal now listen to this you actually mentioned this at the top of the show a few years ago i built a little bot that immediately posted to Twitter when there were insider buys that fit most or all of the criteria I've just described because I built a filter based on the book.

21:36Emmet:And I went, okay, there's the recipe. Let's just spit out the answer. And I even put the little bot's date of birth, the same as Peter Lynch, legendary investor Peter Lynch. So when you went on to Twitter, as it used to be called, and you went to at the insider bot, date of birth was the same of Peter Lynch's but I can't remember what that was but boy what a cat I am I thought you'd be sending him a card every year no but alas when Mr. Musk bought the social network and renamed it to X bots were banished from the platform for good reason I'm sure an insider bot was kicked out however he or it lives on and anyone who subscribes to Horizon as they already know gets access to a secret telecom channel where insider bot writes to with the exact same consistency and dependability as he did 2x before he was booted out so if you subscribe you get this tiny hidden freebie of massive value that's you just install the telegram app on your phone which is a messaging app akin to messenger and whatsapp and every time the insider bot has something to say which is several times a week as you and i know because it also publishes to our internal slack channel um multiple times a week uh you will get it delivered straight to your phone the moment supported to the stock exchange which is usually within 24 to 48 hours and as i said at the top of the show if you want to talk to a man about a deal email frank at my wall street.com and he might even get on a zoom with you right mike examples let's talk about insider buys because they've been flying at us

23:14Mike:thanks to insider bot recently yeah so i highlighted kind of the notable ones from that i'm going to go through a list of them first and then we'll finish with the biggie which is making the most headlines but i think it fits in because a lot of that fits into what we mentioned already whether it's the cluster buying whether it's the virtue signaling um whether it's the true kind of meaningful signal bullish signal um so let's jump in so the first let me shout let me shout out to

23:42Emmet:I'm going to interrupt you after everything you say with a three second random thought. Okay. I promise you it'll only be three seconds.

23:49Mike:Go. Okay. Okay. First one I'm going to mention is Anthony Noto, CEO of SoFi. He bought a million dollars worth of shares on the 2nd of March for$17.88 a share. He owns about$200 million worth of the company. I've seen him do this before. So in my eyes, not majorly significant. What I do find interesting is he almost called the bottom to the cent here. stock is down about 40 % from its November highs and Noto obviously saw a deal this isn't on the same page as the others we're going to list here uh but I do find it interesting and what you mentioned um about them not timing it very well it's kind of the opposite in this instance

24:29Emmet:that is in the Horizon portfolio a pitch that I bought it several times I think highly of Anthony Noto he used to be the CFO of Twitter and he's got brains to burn and I trust him I think he's one of the world's best business leaders love that although i agree a million out of 200 million