In October 2021, I made a big call on Longeveron (NASDAQ:LGVN) stock, a biotech firm working on a promising Alzheimer’s therapy.
Within six weeks, shares had risen over 11x… a stunning 1,000% return!
My secret?
I noticed that the biotech’s CFO was quietly buying shares in the company.
“With clinical results due within the next month, Longeveron’s executives are likely using their knowledge of the Aging Frailty study to predict a strong outcome in the Alzheimer’s trial.”
Just a month later, the company would announce some unexpectedly good news: The U.S. Food and Drug Administration (FDA) approved Longeveron’s Lomecel-B for use!
The Secret to Finding 1,000% Winners
It turns out that Longeveron’s management aren’t the only ones who are suspiciously good at timing their company’s stock.
A study by MIT researchers found that insider transactions in the U.S. would have turned $10,000 into $156,000 over their study period, compared to around $50,300 in the S&P 500.
That’s because insiders often act on privileged information, both knowingly and unknowingly. If sales figures are doing well… or patients are responding well to clinical trials… they don’t need the “official” SEC filings to decide to buy.
Some call it a total scam.
And I get it. SEC rules around insider transactions are surprisingly lax; if a CEO sees a new product performing well or is on the cusp of making a massive deal, it’s often entirely legal to trade on that information. In 2018, Tesla (NASDAQ:TSLA) CEO Elon Musk bought $25 million of his company’s shares while details of a massive $2 billion capital raise were still under wraps.
TSLA shares would rise 206% within a year.
But as I’ve long said, if you can’t beat ’em, you might as well join. If the world’s richest man generated an extra $75 million along the way by using privileged information, isn’t it fair to follow his steps?
It’s a strategy I’ve called the Insider Track.
The Best Time to Buy… Is in a Bear Market
The Insider Track strategy has provenly strong results. Since January 2009, C-Suite buying has generated an annualized return of 20.8%, according to tracking site TipRanks. And in the past week alone, insiders have snapped up $45 million of their corporate shares.
These amounts are admittedly smaller than in previous declines. In May 2020, insiders bought a stunning $161 million of shares after the Covid-19 slump. And today, many sectors are doing worse than in 2020 because of higher inflation and rising rates.
But some American businesses are still humming along. Here are 15 stocks where insiders act as if they know something the market doesn’t.
Top Market Timers
One of the best Insider Track strategies involves mimicking the trades of particularly successful insiders. These are investment firms, CEOs and company owners that have an unusual ability to buy the dips.
B. Riley Financial. The boutique investment bank has a strong track record in trading the companies it owns.
- Lazydays Holdings (NASDAQ:LAZY). In July, the investment bank bought over 10,000 LAZY shares in the $12 range before the CEO announced “remarkable performance” figures. Shares would jump to $17.50. Recent market wobbles have sent LAZY back to the $12 range – an opportunity B. Riley has used to add another 20,000 shares.
Opaleye LLC. Opaleye LLC has a notable record of picking biotech winners. A $16 million investment in Travere Therapeutics (NASDAQ:TVTX) in 2014 is now worth almost $50 million, and a smaller investment in Ocular Therapeutix (NASDAQ:OCUL) netted an even more significant 400% return in 2020. Now, the company has added shares in:
- TELA Bio (NASDAQ:TELA). Since June, Opaleye has snapped up shares of TELA in the $5.75 to $8.25 range in seven transactions. The commercial-stage medical tech firm produces products for soft-tissue reconstruction in hernias, plastic and reconstructive surgery. The firm has a stable business, so Opaleye is likely buying as a valuation play.
- TRACON Pharmaceuticals (NASDAQ:TCON). The biotech research firm is developing an oncology drug that targets the PD-L1 antibody, a known pathway under study by other large cancer research firms. The drug is now in its pivotal Phase 2 trial, giving the stock a significant upside on any good news.
- Protara Therapeutics (NASDAQ:TARA). The New York-based biopharma company has two development programs in its pipeline. OK-432 is designed to treat lymphatic malformations, a common disease thought to affect 1 in every 4,000 live births, and TARA-002, a treatment for bladder cancer. Opaleye’s 19,400 share addition in mid-September brings its stake to 2,575,77, a significant stake in a company with potential blockbusters in its pipeline.
Biotech Stocks
Opaleye’s investments represent bets on biotech — some of the hardest decisions for the Insider Track strategy. Many of these R&D firms are riding on a single drug candidate, meaning one failed trial will send the stock to zero. And as outsiders, we can’t tell the difference between opportunistic insider buying versus “pump and dumps.”
But biotechs are also some of the most lucrative bets, as Longeveron shows.
That’s because biotech executives often know clinical trial results years before the studies publish official results. If half of your patients suddenly stop developing cancers, you don’t need to be a rocket scientist (or a biotech CEO) to realize your therapy is probably outperforming the placebo in your double-blind study. These executives are also generally aware of how discussions with healthcare regulators are progressing.
That leads us to three biotech stocks where insiders have recently bought significant stakes.
Zivo Bioscience (NASDAQ:ZIVO). Director Christopher Maggiore joined CEO John Payne in buying shares in the $3.50 range after shares fell from over $5. The company develops algae-based products for food-based ingredients and has a market value of under $30 million. It’s a risky bet, but Mr. Maggiore’s $25,000 share purchase suggests he knows something we don’t.
Better Therapeutics (NASDAQ:BTTX). The prescription digital therapeutics firm has seen a recent rash of cluster buying. The company’s CEO, CFO and a 10% owner have added $304,000 to their stakes since Sept. 12, a telling sign that the firm might have stumbled on a working therapy. Management previously indicated that its most promising candidate, BT-001, could advance pivotal trials this year or early 2023. Trades centered in the $2 range.
TransCode Therapeutics (NASDAQ:RNAZ). The firm’s CEO and 10% owner added 20,000 shares on Sept. 14, raising his stake to 893,114 shares. The firm has a single therapeutic candidate, TTDX-MC138, in its pipeline designed to treat metastatic cancer. The drug is in preclinical trials, meaning that any good news could send shares up several times over.
Insider Purchases of Public Offerings
Public offerings are one of the best ways to understand insider sentiment. Management can spend months preparing these offerings, giving them a clear idea of the issue’s true value as Elon Musk demonstrated in his 2019 TSLA purchase.
Larimar Therapeutics (NASDAQ:LRMR). The biotech’s CEO, CFO and two directors bought a combined 5.1 million shares at the firm’s public offering price of $3.15. Larimar’s lead candidate CTI-1601 is currently undergoing Phase 1 clinical trials for Friedreich’s ataxia, a rare genetic disease. Shares would jump 15.5% the following day after the FDA lifted a hold on the trial, but such broad insider purchasing often indicates more potential gains.
LinkBancorp (NASDAQ:LNKB). The Pennsylvania-based bank saw 17 executives and directors buy shares in its recent $7.50 public offer – the same price it offered public investors. One director added 80,000 shares in the $7.70 range after prices jumped in first-day trading. Though outsiders won’t get a clear look into the bank’s recent merger with Gratz until next quarter, insiders seem to believe there’s no need to wait for official pro forma figures to buy at market prices.
Cluster Buying
Finally, corporate executives often act together in buying company shares. These are some of the most compelling Insider Track investments to make.
Macerich (NYSE:MAC). The Santa Monica-based homebuilder saw six insiders buy 104,617 shares this week, including the company’s CEO, president, CFO, and head of leasing. The company now trades at 0.6x book value, significantly below its historical average of 1.6x.
Liquidia (NASDAQ:LQDA). Shares of the biopharmaceutical company sank 37% in late August after losing a patent battle with United Therapeutics (NASDAQ:UTHR) Insiders, however, have recently bought shares in the $5.50-$6.00 range, including its CEO (45,747 shares), CFO (8000 shares), Commercial SVP (2,160 shares), COO (1,918 shares) and 10% owner Caligan Partners (250,000 shares).
MFA Financial (NYSE:MFA). Between Sept. 14-15, the financial firm’s CEO, CFO, Co-CIO and a director added over 10,000 shares to their already-substantial holdings. Shares of MFA have fallen 55% this year over fears about its lending portfolio, particularly from its high exposure to residential whole loans. Insiders are buying shares as if the worries are wildly overblown.
B. Riley Financial (NASDAQ:RILY). The company’s CEO Andrew Moore and director Randall Paulson joined owner Bryant Riley this week in snapping up a combined 48,400 shares in the boutique investment banking and wealth management firm. Shares currently trade at under 6x price-earnings, making it one of the cheapest investment banks by that metric.
Tilly’s (NYSE:TLYS). The CFO of the youth-oriented shoe and clothing retailer joined two directors this week in buying up shares in the $6-$7 range. Tilly’s recent share slide now prices the retailer at 1.5x EV/EBITDA (enterprise value to earnings before interest, taxes, depreciation and amortization), around a quarter of its usual value. Given its high operating leverage, a stronger-than-expected back-to-school season could send shares up 2x-3x from current prices.
L. B. Foster (NASDAQ:FSTR). The CEO and CFO of the railroad infrastructure firm bought another 4,000 shares on Sept. 13, increasing their combined stake to over 110,000. The company trades for under 0.6x price-book, its lowest valuation since February 2016. The last time that happened, shares would recover within two months, earning investors a 60% return within two months and another 30% return within the next 10.
Conclusion: How to Use the Insider Track
Not all insider purchases are created equal.
Some industries like biotech, metals and mining are a treasure trove of opportunity. Executives are often aware of promising new drugs and dig sites long before the companies are required by the SEC to disclose material findings.
Following executives in other sectors comes with greater risks. Are insiders at Exxon (NYSE:XOM) buying because of an unannounced deal? Or are they blindly speculating on oil prices instead?
That’s why I tend to avoid companies like HighPeak Energy (NASDAQ:HPK), U.S. Energy Corp (NASDAQ:USEG) and Stronghold Digital Mining (NASDAQ:SDIG) — firms that also recently announced insider purchases. Shares in these firms more closely track the price of oil and Bitcoin (BTC-USD) – assets that no executive can predict.
Instead, I focus on bets with particularly opaque financials and high operating leverage. And though every investment requires deeper research before jumping in, the Insider Track provides us with a strong starting point to beating the markets.
Tom Yeung is a market analyst and portfolio manager of the Omnia Portfolio, the highest-tier subscription at InvestorPlace. He is the former editor of Tom Yeung’s Profit & Protection, a free e-letter about investing to profit in good times and protecting gains during the bad.