Market Overview

How Can Insider Trading Help You?

When most people think about insider trading, they think about hedge funds and other money managers trading on illegal information. As the state of New York is pursuing high profile insider trading cases, such as the case against Raj Rajaratnam of the Galleon Group, retail investors are trying to figure out how to gain their own edge on the markets.

Luckily, investors can turn to legal insider trading. Legal insider trading can be monitored as executives sell or purchase shares of the companies that they manage. By monitoring how affluent executives manage their wealth, retail investors may be able to see where managers think their own company is performing.

Energy Transfer Equity

Energy Transfer Equity (NYSE: ETE) is a large company with a market capitalization of about 9.19 billion. It operates in the natural gas industry by holding onto natural gas and distributing it to clients. IT also built a pipeline in 2010 to expedite deliveries.

Energy Transfer Equity recently experienced a lot of insider buying: in the last week of December 2011, management purchase 1 million shares of the firm. This share purchase program was the largest in that particular week. The company has nearly 223 million shares on the market, however, so this insider buying transaction may or may not guide retail investors well.

Investors can consider Energy Transfer Equity's case to be moderately bullish. Insiders purchased a fairly sizable amount of shares, totaling over $36 million, but they may have purchased even more if they were extremely bullish about the company. On the other hand, management may not want to make extremely large purchases at once in order to mitigate risk of buying at a bad price. Insiders may also not want to raise suspicions by the SEC or by retail investors by purchasing large blocks of shares.

First Acceptance Corporation

First Acceptance (NYSE: FAC) is an automotive insurance underwriter that caters to retail clients. It operates several subsidiaries, which total over 380 individual locations in two states. The company trades with a market capitalization of $60.49 million, meaning that smaller insider trades could have some significance for retail investors.

In the last week of December, First Acceptance Corp management has sold over 7 million shares valued at an average price of $1.45. Considering that the company's total current shares amount to 48 million, the insider selling activity could be considered a fairly major event for the company. Approximately 14.5% of the company's shares were sold that week.

Management may have different motives for selling their shares. First, they may believe that the company is not going to do well in the following months. If this turned out to be true, the stock would naturally decline. Management may also believe that macroeconomic conditions are unfavorable and that the price they sold at was the best opportunity to reap their rewards. They may also have similar sentiments regarding financial services or the insurance industry. Regardless of the reason, investors will want to keep this insider activity in mind, considering the sheer size of insider selling that occurred in the last week of December.

Legal Insider Trading Could be Helpful

In some cases, like with First Acceptance, insider trades could clearly indicate executives' beliefs about their own companies. In other cases, it may not be as helpful. Retail investors have to use all sorts of information to properly formulate long-term trading strategies. Another way retail investors could trade well is by following news on a real-time basis, learning of information and updates as soon as they occur.

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ACTION ITEMS:

Bullish View:
Traders who believe that these companies will outperform in the future might want to consider the following trades:
  • Long First Acceptance by buying shares or buying call options. If you go with the options strategy, you could purchase a straddle just to reduce risk associated with the bet.
  • Carefully purchase Energy Transfer Equity, with a hedge in place in order to prevent adverse price action.
Bearish View:
Traders who believe that these companies will underperform may consider the following positions:
  • Safe strategies with ETE is probably the best idea. Pursue non-directional options strategies on Energy Transfer Equity. Investors could use long-term straddles for this purpose.
  • Short an ETF that tracks insurance companies, as the insider trading in First Acceptance may signal sentiments regarding macroeconomic conditions.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: News Broad U.S. Equity ETFs Small Cap Analysis Small Cap Insider Trades Events Global Economics Best of Benzinga

 

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