Educational Programming Video
The Value Line Investment Survey
Program 10: Insider Decisions and Institutional Decisions
In this session, we will continue our series of discussions about information on the Value Line page by talking about two items that appear on nearly all of our company reports.
Those items are Insider Decisions and Institutional Decisions, each contained just below the stock price Projections in the upper left-hand portion of a report.
First, Insider Decisions. "Insiders," by the way, are defined as the top-ranked officers and all directors of a public company. These are the people who should know most about what is going on at a company.
The Insider Decisions' box contains three pieces of information for each of the past nine months for which data are available. The figures in the line "to Buy" show the number of Insiders who have actually gone on the open market and purchased shares of stock in a company during each month. A figure next to "Options" indicates the number of Insiders who have exercised options to buy stock in a company. A number next in the line "to sell" shows the number of insiders who have sold stock on the open market.
Our data show that Insiders rarely buy stock on the open market. They are much more likely to acquire stock by exercising options, and since the options were typically granted some time in the past, the exercise price is typically much lower than the current market price. When Insiders sell stock, they often sell the shares that they acquired when they exercised options.
Insiders don't always turn around and immediately sell stock they acquired from exercising options, but that is often the case, and the reasons given usually involve an Insider's personal financial situation. Top corporate officers, for example, often have a very large portion of their assets in their own company's stock, and financial advisors may well tell them that they should diversify their holdings. Vacation homes, college expenses for children, divorces, and charitable gifts are other reasons frequently given by executives for selling stock.
What can you learn from looking at Insider data? That is questionable. There are some investors who believe that Insider buying and selling is a very important indication of whether a company is doing well or is doing poorly, and those investors may buy or sell a stock based on Insider trading. There are other investors (probably many more) who don't think Insider buying and selling indicates anything. These investors argue that much Insider trading is done for personal reasons that have nothing to do with the current or future operations of a company, and they also argue that the data on Insider trading is often too old to be meaningful.
Insiders must by law report all their trades to the Securities & Exchange Commission (the SEC), which makes the information public. But the Insiders are given time to make their reports, and by the time investors receive the information, it can be quite old.
What does Value Line think? We think the information is interesting, and we publish it because some of our subscribers want to see it. However, we also think that there are much more important things to look at. In particular, our research shows that our Timeliness ranks are much more useful in forecasting stock price performance.
Now, Institutional Decisions. "Institutions" are defined as large shareholders, often professional investment managers such as those who manage pension funds or mutual funds. Any Institution managing more than $100 million must regularly report holdings to the SEC.
In the Institutional Decisions box, Value Line shows the number of Institutions buying or selling a stock during each of the three most recent quarters. We also show the total number of shares of stock owned by all Institutions at the end of each quarter.
For those investors interested in knowing just how much stock in a particular company is owned by institutions, you can take the holdings we show for the latest period and divide it by the total number of common shares outstanding, as shown in the Capital Structure box just below. This calculation will show you the percentage owned by institutions.
Just how important is this data? There are investors who believe that it is very important to know whether institutions are increasing or decreasing their holdings in a particular stock. If institutions are net buyers, it is presumably positive; if they are net sellers, it is negative. However, this assumes that institutional managers know more than everyone else does, and that is definitely not always the case. Data about institutional holdings are also sometimes very old. While institutions do report to the SEC, they don't have to do so very frequently. Mutual funds, for example, are required to report all holdings only twice a year.
What is Value Line's position on Institutional Decisions? As we said with Insider Decisions, Institutional Decisions are interesting, and there are times when they are meaningful, but we still think there is other material on a Value Line page that is more important for most investors. We don't think anyone should put too much emphasis on either Insider or Institutional Decisions.
By the way, the Insider Decisions and Institutional Decisions information on each Value Line page comes from data submitted to the SEC and collected for us by the Vickers Stock Research Corporation. We have used Vickers as our source of this data for many years.
And, finally, we should point out that there is sometimes no information about Insider Decisions for a company. That is almost always because there is no information available, and that is usually because the company in question is headquartered outside the U.S.
That's it for now. In the next session, we will continue to discuss more information on the company pages in The Value Line Investment Survey.
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