INFO ARB ALERT – INSIDER BUYING
“The insider anomaly advantage has been estimated to be as much as 11 percentage points over the market return annually. The advantage tops out closer to seven percentage points, says Ian Dogan, founder of Insider Monkey, who wrote his doctoral dissertation on insider trading.”.
This figure was based on a broad research study. Now imagine if you could handily beat that 11% figure with more focused research on specific companies that meet certain insider buying criteria. Read on…
- The core of what we do is long-term, but that does not preclude us from taking advantage of short-term opportunities that present themselves during pullbacks.
- Market pullbacks create opportunities. The COVID-19 pullback was no exception and neither is the recent market volatility causing the NASDAQ to pullback around 10% from its highs. The opportunity is clearly evident when insiders start scooping up stock during market pullbacks.
- What is nice about the ignored microcap universe is that these types of buy signals take time to be found by investors, giving open minded investors a chance to “arbitrage” this information disconnect.
- GeoInvesting has a strong pipeline of companies that fit the “insider anomaly“, some which have not risen yet.
- Bottom line? We use the knowledge of insider buying as a means to profit in the short-term and add to long-term core positions. Simple as that.
Why Tracking Insider Buying Is Important Right Now
We don’t take Information Arbitrage (Info Arb) lightly. It’s actually one of the most important aspects of our research that gives us a distinct advantage over the rest of the crowd.
It’s for this reason why when we come across it, we share it with our Premium Member base as quickly as we can. By the way, it’s a great way for any investor of any level to learn more about finding information that others don’t realize exists, and just might be the best way to profit in the market.
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The nice thing about hunting for InfoArb in the microcap universe is that the market can be slow to react to the Arb, giving everyday investors the chance to capitalize on information disconnects.
If you know anything about GeoInvesting, as long as we have conviction in a company, we are usually in it for the long haul.
However, InfoArb, especially in the case of Form 4s filed in the kind of volatile market and uncertain business environment we are currently facing, can be a great tool to help capture short-term gains as you are waiting for your longer-term holdings to pay off. You’ll also quickly find out that we tend to be contrarians (bet against the crowd), which has led to out-sized gains in stocks that other investors first ignored, giving us the clear first mover advantage, especially when we find InfoArb for our Premium Members.
Form 4 Case Study: Call To Action/Long Position in Pacific Ethanol, Inc. (NASDAQ:PEIX)
Below, we are offering a glimpse of our research that we first sent to our premium members to help them understand how and why we track insider buying trends as a strategy to earn shorter term, out-sized gains around our core long positions.
Summary
An important key to why were so bullish on PEIX: The company was trading at low valuation that did not take into account an extremely bullish outlook.
Stock appreciated 53% in 3 weeks, aided by consistent buying and analyst PT of $16. We got in before the analysts (First mover advantage).
On August 19, 2020, in an alert to premium members, we disclosed a long position in Pacific Ethanol Inc. (NASDAQ:PEIX) as we looked into the company’s turnaround initiatives. Several factors caught our attention, although what really piqued our interest was point #5 below since, based on our experience, we knew this could turn into a pattern:
1. Recent strong Q2 2020 results point to growth inflection points:
- Improved Q2 2020 performance: After years of reporting losses, profit inflection point achieved, fueled by selling its alcohol based products into new markets.
- The company reduced its long term debt by nearly 50%
- Offered strong second half 2020 guidance of adjusted EBITDA of $50 to $70 million with momentum continuing into 2021 (first half 2020 adjusted EBITDA was $16.5 million)
2. The company is selling non-performing assets to pay down debt.
3. After years of operational struggles, the company has the ability to pivot and revive idled ethanol plants to address the under-supply in the liquid sanitizers market due to COVID-19. This is giving the company long term visibility for the first time in the company’s history.
“Our high quality alcohol products consistently achieve significantly better margins than fuel ethanol. Moreover, high-quality alcohol is typically sold at fixed prices and volumes with longer-term commitments than fuel ethanol , allowing us to lock in our input costs over the contract term and better secure favorable margins. The majority of our high quality alcohol production is contracted through 2020, and we are building a strong book of sales for 2021 as we add new customers and renew existing contracts.”
4. Extremely strong analyst 2021 EPS estimate of $1.18
5. Recent insider purchase
- Director Gilbert Nathan bought 56,725 shares at an average price of around $3.40
The Company reports its financial and operating performance in two segments: (from 10-Q )
- Ethanol production, which includes the production and sale of high quality alcohol, ethanol and co-products, with all of the Company’s production facilities aggregated
- Marketing and distribution, which includes marketing and merchant trading for Company-produced high quality alcohol, ethanol and co-products and third-party ethanol.
Even though we still need to interview management to gain long-term conviction in PEIX’s new direction, ultimately, we think the company could trade at a P/E of 10 on 2021 EPS estimates of $1.18/share, equating to price appreciation potential of 153% from our initial long disclosure to GeoInvesting premium members.
Sure enough, more insiders piled into the stock; the total shares purchased grew to nearly 250,000 in the days following our initial Call to Action. (See note in chart above)
The Next Form 4 Info Arb Idea WILL Occur
It’s only a matter of time, whether it be in the short term or long term, that we’ll discover and take advantage of the next information arbitrage that comes into our pipeline under the Form 4 category. This category has been good to us and has provided us with some of the best outcomes in microcap investing. Just like PEIX and others that we have invested in, we are banking that with our eye for this trend, we’ll gladly participate in new discoveries where management buys stock in their own company. Just remember:
“Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” ~Peter Lynch
Why We Are Proud Of Our Work
Over 50 companies profiled on Geo acquired, nearly all at a premium to previous day’s closing price, or price since inception of coverage
26 percent of all our disclosed longs have at least doubled at their peaks during the holding period of the position on GeoInvesting.
GeoInvesting longs compiled average is over 44% since 2014.
Stats show that even after we closed our positions, if we had held our positions, the returns would have dwarfed what we reaped, reinforcing the case for longer-term investing.
GeoInvesting longs (termed GeoBargains in the early years) compiled average was over 30% from 2009 to 2014.
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