How to Use Insider Trading and Information for Market-Beating Returns!
Hey Bow Tie Nation, Joseph Hogue here with Let’s Talk Money and a video today that can make you rich. Nation, we’ve done really well this year with some amazing returns like a 200% return on Fastly, and returns of 160% on Teledoc and Zscaler.
But only one group of investors have been shown to ‘beat the market’ consistently and by wide margins every year. In fact, this group has so much power that investing on their information is illegal!
Insiders are the management and board members of a company, people with secret and critical information about a company. And while sharing that information with outsiders is illegal under insider trading laws…they’re allowed to make billions buying and selling shares themselves!
In this video, I’ll show you why insider trading is illegal and how managers and executives get away with it to make millions. I’ll then show you how to follow these inside trades to find stocks that could be ready to explode. Finally, I’m going to reveal five stocks with massive insider buying and selling that need to be on your radar.
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What is Insider Trading?
In simpler terms, insider trading is considered as a malpractice because people who have access to the non public information can undertake the trade of a company's securities. It's not legal for the fact that those information can be used in the event of important decision making.
In the pursuit of this activity, key executives and employees who can access the strategic information about a certain company make use of those information to trade the company's securities or stocks. Therefore, it is greatly discouraged by the SEC. It should be done so as to encourage only fair and just trading among the common investors.
Nation, a 2009 case brought by the FBI and U.S. Attorney Preet Bharara uncovered a network of managers and hedge funds that made over $20 million in profits on insider trading. Jeff Skilling, CEO of Enron, sold out of $60 million in shares just before they became worthless in the 2001 bankruptcy. George Soros used an inside tip in 2002 to make over $2 million in profits on shares of SocGen.
Technically, all these were illegal but only because the information was shared with outsiders and not disclosed before the trading. But insiders are allowed to buy and sell shares of their companies, to trade on that inside information, and it all becomes legal by disclosing the trades.
And that allows you to piggyback on these trades, buying in when insiders suddenly get bullish or getting out of a stock before the shares tumble. To do that, you need to look for these insider trades. I’ll be using the Webull app throughout the video to find these trades and the platform makes it really easy to find insider stocks to buy. You just go to the Markets menu at the bottom then scroll over here to Insider Activity.
I’ll show you how to use the app to find those insider trades on each stock. Click through the link in the description and Webull is going to give you a free share of stock worth up to $1,600 when you make your first deposit.
How to Find Insider Trading in Stocks
Now before we get to that list of five insider stocks to buy, understand that the fact an insider is buying or selling doesn’t tell you everything you need to know. There are a lot of reasons why an executive or a board member might buy or sell that has nothing to do with the direction of the shares.
Insiders are routinely awarded millions in stock options and can build up a massive stake in the company. Even if they believe in the company and the investment, it’s not smart to have all your wealth tied up in one company, especially when it’s your employer also, so insiders regularly sell some of their shares just to diversify their wealth.
Insider buying is also sometimes an effort by the board of directors and management to improve investor sentiment, show investors they’re behind the company. They might not necessarily think the shares are going to take off but they want to put on a positive front.
So for this reason, whenever you’re looking for insider trades and using that to invest, you also need to look at the conviction through the dollar amount and shares, along with how many of the Board and management are trading.
Of course, you also want to look at the fundamentals of the company, how does it look against competitors, to make sure it’s a good investment beyond just what insider trading might be saying.
5 Insider Trading Stocks to Buy and Sell
And our first insider stock is $27 billion pipeline operator Kinder Morgan, ticker KMI, with insiders buying almost 1.8 million shares just this year. For each of these, we’ll scroll down to Press Release on the Webull app and then to Insider Activity to see the individual trades by each insider.
Against that 1.8 million shares in purchases, insiders have sold just 370,000 shares, mostly selling after stock options to diversify. The total buying though is over $22 million in shares but what’s even more significant is that the majority has been co-founder and Chairman Rich Kinder who added over 1.5 million shares this year for control of more than 11% of the company.
The company owns more than 80,000 miles of oil and gas pipeline across the U.S. and draws constant fees from oil companies to use the assets. Everyone in the energy space has been slammed this year with the crash in oil price and shares of KMI are down 42% from January.
But these are cash flow assets and the company has the financial strength to survive while energy prices recover. Even after slowing the dividend growth this year to protect cash, the payout has doubled since 2017 and the shares pay an 8.5% dividend yield.
Distributable cash flow is expected at $5.1 billion this year, so plenty of cash survivability and the potential to take advantage of lower prices in that oil & gas space. Besides that solid dividend, the average analyst target for the shares is at $17.60 each, a return of more than 43% above the current price.
Our next insider stock is a sell, real estate app Zillow, ticker Z, and some massive selling by management. Almost four million shares have been sold by management and directors this year with a giant two million share block sold in August.
Selling has been widespread across the executive ranks with Chairman and President Frink alone selling millions of dollars in shares.
To be fair, I like the Zillow app and think there’s some long-term opportunity here if we can get a lower price on the shares. The platform counts 197 million users and has grown revenue at a 47% annualized pace over the last three years.
Shares have surged 140% this year even as the company posted negative earnings of $0.80 per share. This stock is trading for 5.7-times sales and there are two things that worry me though on shares of Zillow.
First is that insider exodus of the shares. There have been no purchases this year, all the purchases you see are stock awards of 2.1 million shares through compensation. The selling has been consistent but really expanded in July and August.
The second factor is just the downside for housing over the next year. I’ll admit, I’ve been surprised how resilient real estate has been this year. Record low rates have helped keep mortgage activity booming and housing prices continue higher but a lot of that price strength is also a record low inventory of houses for sale.
When sellers start putting their homes back on the market and when the eviction moratoriums get lifted, we could see some serious weakness in the housing market. That combined with a stock price that has just disconnected from reality and this is probably one of my biggest shorts over the next year.
Our third insider stock is another energy pipeline operator, $14 billion Energy Transfer, ticker ET, and an unbelievable 22% dividend yield.
Insiders went on a shopping spree in February and March, picking up almost 11 million shares of the company while selling just 128,000 shares. The buying was widespread across eight directors and executives with just one selling some of their position. CEO Warren alone bought nearly $91 million in shares over the two months.
Energy Transfer isn’t as large as KMI but is still one of the largest energy infrastructure companies so definitely has the financial scale to survive. What I like in ET is that it’s got a big position in its LNG export facility that could give it more growth potential beyond the pipeline assets.
Shares are down 60% this year but the stock pays an unbelievable 22% dividend yield. Unlike others, ET hasn’t cut its dividend but distributable cash flow was down 16% in the first half and could be around $5.2 billion for the year. It’s paying out $3.3 billion in distributions so the DCF coverage of around 1.6-times isn’t yet in the danger zone but I wouldn’t be surprised if it cuts a little off that dividend to protect cash flow. Still, I think you can count on a double-digit dividend yield from this one and eventually some strong price return.
It’s interesting how insiders are doubling-down on these MLP stocks to take advantage of the lower prices. ET insiders now own 15% of the company and we see this trend at most of the pipeline names. The average analyst target of $10.37 per share is almost double the current stock price so even if it takes years to get there, you’re collecting that dividend while you wait.
Our next big insider buy is aircraft components maker TransDigm, ticker TDG, and a really interesting purchase by a private equity insider.
The purchases happened over three months this year; March, May and September with just over one million shares purchased. And that might not seem like much but the company has just 54 million shares outstanding so this buying represents almost 2% of the total control of the company and half a billion dollars in value.
It gets more interesting though, the insider buying has been almost exclusively from one director, Robert Small, a managing director at private equity firm Berkshire Partners.
So this is an outside private equity firm building a position in TDG through its board member.
TDG has actually done really well this year considering the weakness in the airline industry. Sales are up over the last twelve months and the shares are only down about 6% from the beginning of the year. The company has booked an 18% annual growth in revenue over the last three years and has over $4.5 billion in balance sheet cash to hold it over until the industry improves.
This next stock is a monster of insider selling with over $132 million in shares sold at Microsoft, ticker MSFT.
There’s lots of stock awards here but no real purchases which means those big dollar insider sells are just dominating the stock. The selling is widespread across eight insiders as well including $85 million in shares sold by CEO Nadella.
Now Microsoft did book an impressive 13.5% sales growth over the last year but like a lot of tech names, the shares have just exploded with a 32% gain since January. Shares now trade for a lofty 36-times price-to-earnings ratio.
Like Zillow, I’m long-term bullish on Microsoft but I think this sudden insider selling does make me hesitate for the near-term. I think most of it is simply driven by valuation and insiders diversifying their wealth but I would wait for better prices before adding any more of the stock.
Find all the insider buying information on Webull and get two free shares of stock when you open an account. This kind of inside information is exactly the kind of thing you need to give you an advantage on picking stocks for higher returns.
Read the Entire Stock Trading Series