CEO Watcher updates

Hello and happy Monday!

We had a slow week for insider trades as we entered earnings season and many executives entered blackout periods during which they cannot trade.

But that gave me time to finish analyzing the 122,000+ insider trades in my database to improve CEO Watcher.

The goal of this research was to create a better system for identifying the highest signal insider buys and grouping the top insider buys by company to identify the companies where the insiders are the most bullish.

Here are the upgrades.

New Scoring

I have an algorithm that scores each trade based on a variety of factors. I won’t share the exact factors (that’s the secret sauce), but it includes things like

• Historic trade returns for the insider

• Historic win rates (i.e. pct of previous trades with positive returns)

• Number of trades (the more trades an insider has made while having good returns and win rates, the better)

• Size of the trade (the bigger the better)

• etc

Every insider trade is given a score of 0-3. A score of 0 means the trade is not a “top” trade and is not included in my emails/spreadsheets. A score of 1-3 means the trade is considered a “top” trade. The higher the score, the better the trade.

The algorithm was created by analyzing over 120,000 insider trades over 8 years and identifying which factors are most correlated with outperformance. There are many studies that show that insider trades outperform the market on average and these top trades have historically outperformed the average insider trade.

For reference, roughly 33% of all insider trades qualify as a “Top Insider Trade” (i.e., a score of 1-3), 20% of trades have a score of 2+, and 7% have a score of 3.

Many studies have shown that insider trades outperform the market (study 1, study 2, study 3, study 4, study 5). My algorithm then identifies the very best insider trades which beat the market by even more.

Grouping by company

I am also now grouping the top insider trades by company to identify which companies have the most bullish insiders over the last 30 days.

Timeframe

All of the analysis was done using 1-month and 3-month timeframes as those lengths of time appear to have the strongest relationship with insider trading.

This means that the trades marked as “top trades” are the trades that our program has identified as most likely to outperform over the next 1 month and next 3 months.

Insider Sales

You will notice that my spreadsheet and this email only include insider purchase info.

I was able to create an algorithm for insider sales that successfully identified the trades most likely to underperform the market that both made sense intuitively and had a good historical performance. However, insider sales tend to not be predictive during crazy bull runs (like right now or the end of 2023 when the markets shoot up 15%+ in a few months) because the euphoria can last a lot longer than people expect.

So high-signal insiders begin to dump stock as their companies become overvalued, but when the overall market keeps ripping, these companies continue to rip as well.

These companies also tend to be highly-shorted (because they are overvalued, which is why the high-signal insiders are selling), which can lead to massive squeezes that can “rip your face off” if you are trying to short the stock.

So, I am hesitant to share the insider sales rankings due to the higher volatility and risk. While I believe it does a good job of identifying underperforming stocks over a long period, it fails during certain periods, and we are in one of those periods right now.

If enough people are interested in the Top Insider Sales, I will consider adding them.

How to use the new scoring system

As always, this is not a recommendation service. You have to make your own investment decisions that fit your personal investing style.

Some ideas for how to use the data:

• Use it to identify companies to research further. You can see which companies have the most bullish insiders and use that as a list of companies to research.

• Build your own “mini-ETF” of companies with the most bullish insiders. You could buy the top 5/10 companies with the most bullish insiders and rebalance it any time a new company enters the top 5/10.

• Chart each company that has Top Insider Purchases to identify charts that look conducive to selling puts against.

• etc

There are many ways to use the data. I personally run the “mini-ETF” strategy with a portion of my portfolio, which has been working out pretty well. They also tend to be stocks I would never hold in the rest of my portfolio (which is much longer-term focused), so it’s nicely uncorrelated.

Free v Premium subscribers

Free subscribers will continue to receive the same weekly email with 3 of the week's Top Insider Purchases.

Premium Subscribers will receive a daily email with the new Top Insider Purchases, the ranking of companies with the most Top Insider Purchases from the last 30 days, all of the Top Insider Purchases from the last 30 days, and the current returns for all of those trades.

Example screenshots

Here are two screenshots from the Google Sheet for CEO Watcher Premium subscribers.

Note: the actual spreadsheet for the Top Insider Purchases includes all of the Top Insider Purchases from the last 30 days, the URL to the filing for each trade, and the current returns for the trade.

Here is a screenshot of the most recent 3-point insider trade. All new 3-point trades are announced in the CEO Watcher Premium emails

If you want to upgrade to CEO Watcher Premium, you can do so here.

Let me know if you have any questions!

Connor