Using insider trades as a fundamental research strategy

As known, insiders have a huge information advantage and their positioning can indicate their confidence in their own stock. While they can sell for many reasons (taxes, divorce, buying a boat), they only buy on the open market for one reason 🙂 they think the stock is undervalued

What's working so far

To turn this theory into a deployable strategy, I've created the following criteria to boost returns, but you can discover your own strategy.

Criteria 1: Small caps Blue chip stocks will already have algorithms trading on this data, but anything under $500M in market cap will not have institutional/algorithm investors due to the liquidity constraint, but the smaller the better. A few sites will enable you to filter these trades by market cap of the company

Criteria 2: Materiality The purchase must represent a meaningful portion of their net worth or salary. I filter for trades above $1M in value. I also filter for trades that increase their positioning >10%. Anything lower is just not material. The best signs are when the insider goes all-in on their own stock. No one without significant positive info will materially put their net worth and career all into the same basket.

Criteria 3: Information asymmetry The best trades I have found are those where insiders have much more information than the public. So far, I've found Biotechnology and Gold companies to be the best. Biotech insiders will know interim data on their latest drugs before they are required to publish to market. Gold insiders know assay results or new discoveries.

The best trade I made to-date has been Alumis Inc, where the chairman of the board has been adding $1.5mn every two weeks to his position. Immediately stood out among all the other trades, and shares climbed in the months following from $5 to $25 with major news with their pharma pipeline. Not sure how the chairman is allowed to do that, but I am glad to hitchhike off his greed.

Criteria 4: Buybacks The company must be reducing its net share count by at least 2% to 3% annually. This confirms that management also views the stock as undervalued relative to its intrinsic cash flows.

Criteria 5: Aftermarket I found a major advantage in trading in the aftermarket for this type of transaction. Most insider trade reports occur in the evenings, after the market closes, but there's not enough liquidity for institutional investors to trade, so the price reaction is typically delayed until market open the next day.

Overall, a key part of the trading strategy depends on trading the information asymmetry in low liquidity stocks or environments, such that retail investors have an edge where the big algorithms cannot.

Anyone try anything similar or have improvements to the strategy?