Yahoo, Inc. and Insider Trading Analysis

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New York, NY – According to an article in this morning’s Wall Street Journal, last Tuesday and Wednesday, Yahoo President Susan Decker bought 47,000 shares of the company’s stock for an average price of $23.60 per share.  Ms. Decker made these purchases shortly after the stock hit a three-year low.

What makes these purchases unusual is this was Ms. Decker’s first open market purchase of company stock.  In addition, Ms. Decker’s purchase was just the fourth such purchase of Yahoo stock in the past four years, and was the largest open market acquisition in more than four years.

The definition of Insider Trading (legal)

There is an important thing to remember, senior company executives, like Ms. Decker can legally buy and sell stock in their own company.  Their trading is restricted and illegal only at certain times and under certain conditions.

The SEC considers insiders to be company directors, officials or any individual with a stake of 10% or more in the company.  Insiders are required to report their insider transactions within two business days of the date the transaction occurred.  Changes in insider holdings are sent to the SEC electronically as a Form 4, which details a company’s insider trades or loans.

This information is extremely valuable to individual investors.  For example, if insiders are buying shares in their own companies, they usually know something that normal investors do not. They might buy because they see great potential, a merger, acquisition or simply because they think their stock is undervalued.

One of the most noted investors of all time, Peter Lynch, was fond of saying “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”.  Insiders are prevented from buying and selling their company stock within a six-month period of a major transaction.  Therefore, insiders buy stock when they feel the company will perform well over the long-term.

What the Research Says

Nejat Seyhun, a well known professor from the University of Michigan, found that when executives bought shares in their own companies, their stock tended to outperform the overall market by 8.9% over the next 12 months.  Conversely when they sold shares, the stock underperformed the market by 5.4%.


Where To Find Insider-Trading Data and Analysis

Insider trading data is nothing new.  For years, people have been basing their investment decisions on the actions of insiders.  While this data is important, it must be noted that large companies often have hundreds of insiders, which means trying to determine a meaningful pattern can be difficult at best.  Consequently, astute investors try to understand what insiders are doing as just one part of their overall analysis process.

In fact, based on Integrity’s database of close to 1,500 investment research firms, we have identified nearly one dozen firms that collect and provide insider trading data or analysis on U.S. publically traded companies.  The firms that are best known for institutional quality insider trading data include Vickers Stock Research and the Washington Service.  A few other firms provide both data and analysis, including Muzea Insider and newcomer, InsiderScore.

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