There is no better "heads-up" in the stock market than top executives and directors piling into their own company's stock with their own money at current market prices.
Dozens of academic studies and more than two decades of personal experience have demonstrated that there is no better “heads-up” in the stock market than top executives and directors piling into their own company’s stock with their own money at current market prices.
As buy signals go, it just doesn’t get much better than this. Why? Because corporate insiders have access to all sorts of material, nonpublic information that is not available to the rest of us, including the direction of sales since the last quarterly report, the addition of major new clients or customers, new products and services in development, the likely resolution of pending litigation, and so on.
That’s why the SEC requires insiders to file a Form 4 within 48 hours of each purchase, detailing how many shares they bought, at what price and on what date.
Over the years, however, I’ve learned that some insiders are much more astute than others. And the single-most knowledgeable one in the nation, in my view, is shareholder activist Carl Icahn.
Best in the business
Icahn began his career on Wall Street as a stockbroker in 1961. In a recent Forbes interview, he says he quickly learned that “attempting to determine if the market will rise or fall is a complete waste of time. There are simply too many variables. To be a successful investor one must look for situations where the risk/reward ratio is greatly in your favor.”
He found those favorable odds when he pioneered and perfected his “activist” model of investing. Icahn believes many American companies are undervalued because they are mismanaged.
Yet booting incompetent management isn’t easy. CEOs and their boards can build heavily guarded walls to protect themselves. It takes a lot of time, money and — most of all — practical experience to force management out or get them to change course. Yet Icahn has managed to do it time and again.
Over the years, I’ve made a bundle for readers by recommending companies, including Motorola, Navistar, CVR Energy and Hain Celestial, not long after Icahn accumulated a stake of 10% or more — and was legally required to disclose his ownership stake.
Every investor gets one vote for each share of stock he owns, but investing in public companies is usually a passive activity. Even if you own tens of thousands of shares of a company, your ability to influence management is greatly limited. Yet Icahn has the risk capital, the expertise and the cojones to force positive changes that benefit all shareholders.
Most investors don’t realize just how good he is. For example, from January 2000 through August 2013, the S&P 500 returned 52% with dividends reinvested. Warren Buffett has done much better with Berkshire Hathaway (NYSE: BRK-A). It’s up 208% over the same period. But Icahn’s holding company, Icahn Enterprises (NYSE: IEP), has returned 1,126% with dividends reinvested.
The man clearly knows what he’s doing. He recognizes opportunity when public companies are selling for far less than they are worth … including his own. On Jan. 30, 2012, for instance, he purchased 13 million shares of Icahn Enterprises in the open market at $36.79 per share, an investment of over $478 million.
That’s no small bet. Yet it paid off big. Last year’s investment is now worth a cool billion dollars.
Yes, it definitely pays to watch what the insiders are doing. Perhaps, especially if their name is Carl Icahn.
The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.