Ahead of the Curve ™
Biotech – Cowen Analysis: When Insiders Buy, Investors Should TooJun 30 2017
Report by Phil Nadeau, Ph.D., Eric Schmidt, Ph.D & Joseph Thorne, Ph.D.
We analyzed 4K+ open market transactions made by insiders at the 10 largest biotechnology companies over the last 10 years. We find that purchases by insiders are a strong predictor of outperformance, while stock sales by insiders have little predictive value. When insiders purchase shares of fundamentally strong companies, a successful strategy would seem to be to buy right along with them.
We Analyzed 4K+ Open Market Transactions Made By Insiders At The 10 Largest Biotechs And Assessed The Subsequent Stock Performance
Insiders at biotechnology companies routinely buy and sell the stocks of their employers. These transactions are a common topic of discussion among investors who debate what the insiders’ trades predict about the future performance of the stocks. Rarely, however, are real conclusions reached, and almost never are those conclusions ultimately verified by data. In order to get a better understanding of what these trades predict about subsequent stock performance, we undertook a systematic analysis to determine the average performance of the ten largest biotechs over the one, three, six and 12 months following insider transactions during the last 10 years.
Insider Purchases Predict Outperformance, While Insider Sales Do Not Predict Underperformance
We found a consistent pattern of outperformance in stocks compared to the NASDAQ biotech index following purchases, over each of the time periods analyzed. Following purchases by insiders, stocks outperformed the NBI on average by 1.5% over 30 days, 4.8% over 90 days, 8.2% over 180 days, and 19.5% over 365 days. Conversely, following insider sales, the stocks of the 10 companies analyzed performed on average more or less in line with the NASDAQ Biotech Index over the subsequent 30 (-0.1% relative performance), 90 (+0.7% relative performance), 180 (+1.9% relative performance) and 365 days (+3.9% relative performance). Most striking, the stocks performed markedly better after insider purchases compared to insider sales. Over every time period the stocks appreciated by a greater amount, and they outperformed the NBI and S&P500 by a wider margin. The difference in performance is actually quite large: in the 30, 90, 180 and 365 days following purchases, the stocks appreciated by 1.5%, 5.2%, 9.4%, and 16.5% more than they did over the same period following sales, on average.
Our Conclusion: When Insiders Buy, Investors Should Too
Perhaps the most succinct interpretation of our data is one that has been suggested by Peter Lynch for some time, that insiders sell for many reasons, but buy only because they think the stock will rise. On those rare occasions when insiders purchase, a successful strategy would seem to be to buy shares of companies with strong fundamentals right along with them. During Q2:17 insiders have made purchases at three of the 10 largest biotechs: Alexion (Outperform, $122), Biogen (Outperform, $271), and Incyte (Outperform, $130).
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