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Small-Cap Stock Category Sees Most Insiders Buying Since Spring of 2020

Markets
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Small-Cap Insider Buying Ratio Could Mean a Market Bottom is Near

There are more insiders buying at small-cap firms than there are insiders selling. This wasn’t the case in April and is still not the case for large-cap stocks where there are far more inside sellers than there are inside buyers. Insider buying is the purchase of company shares by a director, officer, or other executives with insights from the “inside.” And, it can be a good indicator of future results.

According to Verity, an investment research & data platform, as reported by Barron’s, insiders at S&P 500 firms are acting the same as they had in the first quarter, laying low and playing a game of wait and see. But this is not the case for small-cap insiders.

Large-Cap
Insider Ratio vs Small-Cap

There were 272 insiders selling shares at S&P 500 firms during April compared with 32 buyers (11.8%), according to Verity. Looking at month-to-date, there have been 225 sellers and 42 buyers (18.7%). Put another way, within the large-cap index, for May; there have been more than five sellers for every insider buying company shares.

According to Ben Silverman, Director of Research at Verity, large-cap “Insiders are, by and large, not buying,” adding “More positively, we are still seeing lower-than-typical levels of selling. There’s this unwillingness to accept the current valuations and generate liquidity at these valuations.”

Silverman sees more positive signs for small-cap stocks included in the Russell 2000. During April, there were 388 sellers and 105 buyers at firms included in the Russell Small-Cap index. For May, this has turned around. Over the past weeks, there were 327 sellers to 395 buyers. If this ratio holds, it will be the first month with more buyers than sellers since pandemic lows in March 2020.

For the week ended May 17, there were 281 buyers—the most since the week ended May 19, 2020. Even more promising, according to Verity, was the ratio of buyers to sellers, which was 2.8 to 1. The one-year average is 0.7 to 0.8, representing that there had been more sellers than buyers. Silverman says he’s encouraged that insiders at small-cap firms are buying. He noted that we’re in the early stage of insider season when most firms open their quarterly trading window.

Small-Cap
Interest

Could this indicate a market bottom is near? Referring to the small-cap insider interest, Silverman said, “We’d like to see this number continue to grow or at least not decline significantly because historically we’ve seen buying momentum either sustain or build over a three-to-five week period near market bottoms.”

With a more refined look at the sector, Silverman sees buying momentum in the industrial goods space, including transportation, machinery, and electronic equipment firms. His view is the upswing in buying activity at regional banks is a positive sign since he believes they generally have a good pulse on local economies.

Take-Away

The knowledge that insiders are purchasing company shares can signal they have confidence in the future share price of their company. It may even indicate a market bottom is near. During the month of May, the small-cap stocks captured within the Russell 2000 index saw a far higher ratio of buyers to sellers than the S&P 500 large-cap index. What’s more, the last time this confidence indicator was positive was over two years ago.

Channelchek is a small-cap stock, data, and information resource, specializing providing users a means to explore and discover opportunities among smaller companies. Start your small-cap company
research on Channelchek.

Paul Hoffman

Managing Editor, Channelchek

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Sources

https://verityplatform.com/insights/

https://www.barrons.com/articles/stock-market-recession-inflation-federal-reserve-51653328257

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