Ted Dixon | Studying Insider Buying & Selling Can Help Increase Your Investing Success

Ted Dixon is the co-founder and CEO of INK Research.  INK stands for Insider News and Knowledge and is North America’s first online financial news and research service.  It provides investor insight into what public company executives and significant shareholders are doing with their ownership interests.  In this interview, Ted shares regarding what investors need to know about insider buying and selling and how to determine if insider buying should be considered a buy signal for a certain stock.  Ted also discusses what current insider buying is indicating about sentiment towards the junior resource sector.

INK Research provides a free source of insider trading alerts and reports across both the U.S. and Canadian stock markets. Free INK services are found on CanadianInsider.com and InsiderTracking.com. Ted Dixon has also lectured in corporate finance at the British Columbia Institute of Technology. Before starting INK, he worked at the Connor, Clark & Lunn Financial Group where his responsibilities included portfolio strategy and product development. He has also been an analyst at the Fraser Institute and a treasury specialist at TD Bank. In the early days, he was a floor trader on the Vancouver Stock Exchange. Ted is a Chartered Financial Analyst and member of CFA Vancouver (formerly The Vancouver Society of Financial Analysts). He holds an MBA in financial management from the University of Chicago and a Bachelor of Commerce degree from the University of British Columbia.

0:05 Introduction

1:54 Ted’s background and the founding of INK Research

4:10 What is an insider and what legal documents must they file?

8:05 How do you determine the significance of a specific insider share purchase?

14:17 Investors must contextualization insider purchases by high-net worth individuals

19:50 When does share price appreciation usually occur after major insider purchases?

21:18 Insider buying in a private placement

22:31 What should investors want to see insiders doing with their options?

26:08 What current insider buying is saying about the junior resource sector

29:07 Who can benefit from INK Research’s subscription services?

BEGIN TRANSCRIPT:

Bill: You are listening to Mining Stock Education, welcome back and thanks for tuning in ladies and gentlemen. I am Bill Powers your host. My guest today is Ted Dixon, co-founder and CEO of INK Research Corp. INK stands for Insider News and Knowledge and INK Research is Canada’s first online financial news and research service. Dedicated to providing data on public company insider trading. Ted joins me today to discuss insider and institutional buying and selling and how investors can use this information to help find potentially good investments and determine whether they should be buying or selling a certain stock. So Ted, thanks for coming on the podcast.

Ted: Bill, thanks for having me.

Bill: You focus on monitoring insider and institutional buying and selling. And you also are based in Vancouver and you know a thing or two about the junior mining industry. But I’d like for you to share, regarding your professional background first and why did you came to found INK Research.

Ted: We found the company back in 2004, both myself and Henry Chan who runs all the technical and data base side of the business. We both worked at an investment management firm called Connor, Clark & Lunn which is a multi billion dollar investment manager here in Vancouver. When we saw the Canadian regulators get their act together and provide a data base of insider trading activity, now what that means is that if you’re a CEO or a CFO or a director of a company, starting back in 2004 basically you had to file all your trades and your ownership on one unified database in Canada that would record insider activities.

This is all legally above board type of reporting of insider trades. When you’re an insider you just have to file what you’re doing with your shares. And we were able to capture that starting in 2004 in this new database at the time, that the Canadian regulators had set up. Before then, Bill, it was all a kind of a patchwork, different provinces. You had one province that actually used fax to … if you wanted to find out what an insider was doing, you had to do a fax request and they would fax you back the information. It was all a big old mess.

But they fixed things up in 2004 and they did a pretty good job. We’ve got a really good insider reporting system in Canada in terms of its ability to capture data, and we’ve done the best we can, we think, in taking that data and putting it into a context that investors can use.

If you just go to the database that the regulators have put together, it’s a bit of a mumble jumble of data. We take it, and we sort it and store it and put it together with other data, stock price data, fundamental data, technical data in order to analyze some trends that are appearing in terms of what insiders are doing or aren’t doing, and what’s going on with the share price.

Bill: Can you define for us legally what is an insider. And then what documents are they legally required to file?

Ted: Well in Canada I guess the best way to characterize an insider is if they have significant impact on the direction of the firm. Strategic or financial. You’re really an insider so you’re not really supposed to skirt the rules by saying, “Well I’m a consultant,” but you’re really running the company. If that’s the case you’re still an insider. Also if you own 10% or more of the company, you’re deemed to be an insider. That’s basically who gets captured in the system in terms of having to file.

But basically in Canada you have to file within five days of your trade, that’s compared to two in the US. But it’s generally, I think, you know, in the US its two business days, in Canada it’s five days. So it’s pretty competitive with the US system and there are some exceptions here and there, but for the most part, if a CEO, a CFO or a director is selling or buying stock, you should know about it pretty quickly.

Bill: And then there are the blackout periods. Can you explain what blackout periods are?

Ted: Blackout periods are act best practice periods where an issue where we tell it’s insiders, no trading until we release, for example, our quarterly report. So if they’re going to … for example when Apple is going to release its quarterly reports, which I believe it’s doing today, the insiders would not be able to trade in advance of that on a discretionary basis. Now there are plans where they can get approval, that they can, you know, automatic sales and the like. But in general you’re not supposed to just decide you’re going to sell a bunch of shares in a blackout period that’s in order to ensure that an insider is not benefiting from, oh I got a sneak preview of the results, I’m gonna buy or sell. That’s what those blackout periods are for.

Now in mining it’s bit different in that quarterly reports in a lot of junior mining companies don’t really mean much. Those companies aren’t making any money and they’re out drilling. What the blackout period should be, once the results of any drilling come in, there shouldn’t be any trading until those results are put out into the public market. So there should be a blackout period and if an insider were to get wind of the results of a drill and to trade off of that, then they would be in some hot water with the securities regulators.

Bill: One thing I have observed when either good or bad drill results come out on a junior exploration company, I like to go back and look at the stock chart to see how the stock was trending going into the release of the assays. And sometimes when I see them trending downwards into the release of assays, I think to myself there were some loose lips somewhere. Do you have any commentary on what you’ve observed in the junior mining sector regarding that?

Ted: You know, I think it does happen from time to time where you can detect some sort of an anticipation. But to be honest with you, Bill, I think in a lot of cases this is the wisdom of the market preparing itself. Yes, there are isolated cases where there have been some situations, but in general, the insiders know that the regulators would be pretty much on the case if they were to take advantage of it. And so, we don’t see a lot of it, but certainly the market will try and anticipate what’s happening and I think it doesn’t just happen for junior mining, it happens just in about every industry.

Bill: So when you see an insider buy that’s publicly reportable knowledge, we have that fact, that piece of information, but just like a word in a sentence, the word has a semantic range of meaning, but the specific meaning of the word is determined by the sentence and the paragraph that encompasses the sentence. So when you relate that analogy over to the insider’s buying of their shares, or selling of their shares, how do you contextualize that to ascertain what that means.

Ted: Since I think the focus of your audience is junior mining, I think there’s a couple of I would call, rules of thumb, that you want to look at when it comes to insider activity in junior mining.

The first is a liquidity event type of activity, Bill. That is the company releases drill results in the stock pops. Well you want to find out, are the insiders dumping all their shares on that pop, right? And that is generally a … bells are going off at that point for me, saying this stock is coming back down, and if you see significant selling. If you see more than one insider selling and jumping on this liquidity event. Then that’s usually a signal to take some money off the table along with them.

The other is an example of when maybe drill results didn’t meet market expectations or the market got ahead of itself, and then there’s a sell on news. Well you want to go and you want to find out if the insiders are buying the dip. That would help signal that the market has over-reacted, that the insiders have a stronger confidence in the longer term play that’s going on. That the market hasn’t analyzed the results properly. It is a good way to determine whether there’s any interest there amongst the insiders to pick up an oversold stock.

You want to look at both the high flying and the low flying situations and what are insiders doing. You want them buying the dips and then you don’t want them selling the pops.

Bill: When you look at an insider buying and purchasing shares of their company, for that to indicate that would be possibly a good buy indicator for the average investor, do you look at things like that individual’s buying versus their personal net worth, if that information is available? Or, their buying versus the overall direction of the stock, or the amount they bought versus the market cap of the company?

Ted: Well in the work that we’ve done, we haven’t been able to determine a strong signal based off of the relationship between the amount bought and the persons holdings or net worth. What we do look at is the timing of the buying, the intensity of the buying. Our experience basically, particularly in Canada, is that it’s rare that insiders will buy unless they think the stock is going up. So it always is helpful to have a degree of skepticism about any signal, about any situation. And I’ll tell you one of the biggest pitfalls of following insiders is that they can be guilty as anyone of wishful thinking. In fact, as a rule of thumb we would classify CEOs as probably the most susceptible to wishful thinking-

Bill: As the visionary?

Ted: As the visionary and CFOs as being the least. When you see CFOs buying that’s a really positive sign, because they hardly ever buy and they’re always conscious of the bottom line. If they open up their wallets that’s usually a pretty positive sign. That always catches my attention when I see a CEO buying, sorry a CFO buying.

When there’s a CEO buying you like to see others in the company buying along with that CEO. Every situation’s a bit different though, of course. And you also have to look at their other holdings. And you can do that a little bit easier on INK Research, which is our paid subscription service, than on CanadianInsider.com which is our free service. But once you get to know an insider, you know what other companies they hold. What are they doing with other companies? Are they well diversified or are they really betting the farm on this one play?

I’ll give you a prime example of a well-diversified insider is Eric Sprott who heads up Kirkland Lake Gold. He has his wealth tied up into many different companies in the mining space. He’s taken a diversified approach, a purchase or a sale might be interesting, but you just have to realize that he is well diversified and he is not betting everything on one play.

Just because he’s buying in a certain stock. Well that’s a positive sign, but it’s a positive sign based off a strategy that’s taken a diversified approach in the market and it’s not necessarily, I would say, a slam dunk that that particular play is going to pan out. But it’s still important to see what somebody like him is looking at and once you understand, the type of plays he’s going after, well then you can maybe, you know, it can maybe help provide some context for you as an investor. Is this another stock I should look at, bearing in mind that Eric Sprott, for example, has invested in this stock, but that he doesn’t have all his eggs in one basket.

What is interesting right now, he’s taken taken some money off the table at Kirkland Lake Gold, after a fabulous run, the stock has doubled in the past two years, and he’s taken some money off the table and so now we are watching, where is he redeploying some of that money. And that’s going be very interesting going forward.

Bill: And I think for the average investor too, when you see an ultra high net worth individual like an Eric Sprott, put a million dollars or two million dollars into a junior explorer, you want to put that in the context of his personal net worth. Because he might invest two million dollars and that might be the equivalent to a thousand or five thousand or ten thousand dollars to the average person.

Ted: Well that’s right, and again he’s well diversified in the space, so one may be thrilled about a certain story that he’s invested in, but don’t allow that one trade by that one individual to over-weight your enthusiasm for the stock. But try and look and see, put in context well Eric Sprott is buying this stock, but he’s not moving all his money into it. It’s a good way to put some context around what insiders are doing. Exactly like you say, how much of their overall strategy is going in this.

And then you’ve got other examples. Where CEOs they focus on one company and they’re basically betting it all on that one company, there’s a high level of conviction there. There’s a strong signal, but you also have to then ensure that the insiders not guilty of that wishful thinking that we’ve talked about. How do you help mitigate that, what are other people in the company, are they with the CEO, has he got a team around him that’s also got good holdings and good interest in the company. That’s one thing that we would look for.

In our INK Research subscription service what we do is we rank companies in Canada, but based off, not only their insider commitment, but also their valuations and their price momentum. This helps to put the insider situation in perspective. If a stock is very cheap and the insiders have a strong commitment in that stock. That’s a positive sign, even if the stock price is languishing. That would be a good signal for value investors. If the stock is soaring and insiders are still buying. That’s even a better signal, that means that they believe in the growth opportunity.

Why that approach can help mining investors, is it gives you a unbiased view, based off of the data that’s publicly available, that we bring together that can allow you to put what the insiders are doing in context.

What it does not do, is put it in the context of the geological, science work that’s being done. That requires fundamental analysis we do not provide that. That’s where you’ve interviewed a number of different players in the industry that provide newsletters and research. That’s what their research comes in, it should be used complementary to what insiders are doing, but we do not provide that type of fundamental geological analysis that one has to have a certain level of understanding about when you’re investing in a mining play.

But we do cover some individuals who provide independent research on mining stocks on CanadianInsider.com, through some of our posts there. There’s always some exceptions you find at the end of the day, but generally our focus is on independent researchers that are not in the pay to place space, I think you’ve got to be very careful there. You have to be careful with insiders getting carried away, with wishful thinking, there’s a lot of conflicts in this industry as well, I’m sure you’ve covered that.

As the market gets hot and starts to pick up, again that’s where you want to use the insiders for. If you see a stock that’s being promoted very heavily by newsletter writers, and you’re not exactly sure if this is independent advice or not. Well just see what the insiders are doing. Are they holding on to their stock, as the stock is flying or are they selling. That’s why its a very important tool to use in this market. Especially when things start to get hot, but when things are not hot, it’s a good tool to use to find out are insiders picking up depressed shares. Because as a value investor that’s when you’re going to make your most money when no-one else is playing in the space. With only a few people willing to take the risk of sitting on a stock that’s under valued, under appreciated. But if the insiders are also doing the same thing then you have some comfort that you’re heading in the right direction.

Bill: Have you done any historical studies on looking at insider buying on, let’s say the Toronto Venture Exchange, and then after you see a large group of insiders buy historically, how did the share price react the next six to twelve months, understanding that there’s other factors that are at play, not just insider buying. And what can we learn from any study like that?

Ted: In general what we’ve found, the insider signals that we look at when we put it in context of valuations and price momentum. The signals … the sweet spot is about six months, so even if there’s an initial reaction, provided your time horizon is six months to 12 months the signal should be pretty good. That’s on average. So clearly there’s going to be times when stocks disappoint and there’s going to be times when stocks even do better than we expect. That’s on average. That’s why a diversified approach when you’re following the insiders is important, as it is anytime. There’s always going to be exceptions to the overall rule, but six months we found is pretty much the sweet spot. Three months to six months, that time-frame, but the signal does persist out to a year.

Bill: When you analyze insider buying in a company’s private placement, what positive things do you look for from the outsider’s investor perspective?

Ted: Well we put more emphasis on public market buying and we look at option exercises. I think particularly important in the junior mining space. We don’t put as much emphasis on private placements. Primarily because generally we’ve found that public market activity is a stronger signal. Secondly, some of these private placements are sweetheart deals that, if you’re grabbing a private placement that’s below market price, got a five year warrant attached, well, you know, why not, right? We come across and we do look for private placements with sweetheart arrangements, and we do not necessarily find that as a positive sign. It’s not something we would put out to our user base, and readers and subscribers as being a positive signal, if anything, we would probably be a bit concerned about that. Especially those situations where you’ve got warrants that are multi-year warrants, those are never something you like to see.

Bill: What about options? What do you want to see the insiders doing with their options?

Ted: Ideally, you want to see them, and they are a fact of life in the junior mining world. You want to see them exercising them and holding on, once they’ve exercised them. There’s nothing wrong with exercising and taking some profits, particularly in the producers. But you do have to look at their overall holdings and if, for example, the CEO. You know I often hear a CEO say, “Well you know I don’t own any stock, but I own lots of options.”

Well first of all that’s a huge red flag. If you ever hear a CEO say that, do not buy the stock, okay. Secondly, if a CEO exercises all their options and they sell everything, and they own no shares or just a few thousand shares. Well that’s another red flag. It’s what’s going on here, there’s very little real alignment with the shareholders.

One thing in this industry Bill, you really have to look out for, not only the warrant clippers that’ll get in and grab these private placements with five-year warrants, and hope for the best. But a lot of insiders will ride these companies and just clip fees and consulting fees, so you really have to also look at, not only their net worth, but you have to dig into the MD&As. Look at their related party transactions and see which consulting companies are being paid for out of the treasury and who’s involved with those consulting companies. You have to put that all into context.

There’s a fair bit of that that goes on in the junior mining space. A lot of it makes sense, I don’t want to suggest that there’s anything wrong with that. In many cases that’s the best way to keep costs low. You can get a number of junior mining companies that use the pool services through consulting firms, that’s fine. There’s a lot of that that goes on, that makes a lot of sense. But what you do want to look at is, is there one or two individuals that are really kind of making a lot of money here from related party transactions. Then you put their own shareholdings into context, if they’re taking a lot of money out of the company and they don’t own any shares, well that would be a … I would just move on. There’s got to be better opportunities in the market than to invest in a company which is essentially being run for the benefit of the insiders.

What you want to look for is a balanced, common-sense situation, where you’ve got good insider commitment, where the CEO and directors have their own shares in the company. And that they’ve got reasonable expenses. You’re not going to run a company for free. It costs money. You do have to have an office and you do have to have a geologist and you do have to have a CFO. Sure, you’ve got to run the company efficiently, but if you see some big checks being cut, take a look and see where those checks are going. And what kind of shareholding commitments and are those shareholding commitments, have they all been purchased in very lucrative…

Bill: Financially advantageous?

Ted: That’s right financially advantageous deals, with multi year warrants. That’s when putting on the smell test becomes essential.

Bill: As you look at Toronto Venture Exchange, specifically the resource stocks on it in 2018, regarding some of the bigger gainers, can you speak from your observation? What where the insiders doing on some of the best moving stocks last year.

Ted: Our insider indicators and we provide this for our INK Research subscribers and also reference it from time to time in CanadianInsider and also our CanadianInsider club members get access to the indicators via our market report. They’ve been very bullish. Canadian insiders have been very bullish on the mining sector now for a while, but sentiment really peaked out here, I’m just going pull it up now that we’re talking. I was just looking at it the other day. It really seemed to peak, just very shortly ago, in December. Which is a good sign because insider buying tends to peak, Bill, when you’ve got peak value in the market.

In other words, insiders buy when stock prices are low. In that sense it’s kind of counter intuitive, why would … Ted, why would your INK indicators be screaming higher here when the stock price is going down. Well that’s because that’s how insiders generally react, when the stock price is cheap they buy. And when the stock price is expensive they either sell or they don’t buy.

So right now we’ve got a very nice, bullish formation in the mining sector in Canada, so it’s hopefully signaling something positive for the year to come here, 2019. Have we had false starts before? Yes we have. But, you know, I’ll tell you when we get to these levels that we saw last year in the gold sector, it’s usually pretty strong. It’s usually a pretty good signal, you know, we’ve seen for example the ratio of companies with key insider buying to selling, in terms of gold stocks, over 6:1. Well that is a really high reading in terms of insider sentiment. Usually when you get that kind of reading you’ve got a good chance that you’re going to have decent returns going forward.

Now we’ve come a little bit off that base already, the industry’s already had a bit of a recovery since the Fall, but we still see, based of our indicators some momentum that can take place here, so we’ll keep an eye on it and we’ll keep watching to see if share prices are able to get back to where they were last summer. What insiders were doing at that time, are they taking money off the table or are they selectively adding to their positions.

Bill: Ted, as we conclude I’d like you to share regarding the ideal person that could benefit from your services. Because I believe you offer alerts too, right, regarding insider buying.

Ted: That’s right. Basically let’s look at two types investors if you’re just looking as more of a hobbyist, in terms of your investing activities in the junior mining section, you want to go to CanadianInsider.com where we have some free information. And if you like some of the reports that we have there which you can download for free, you can join the CanadianInsider club, that’s CAD $299 per year.

But if you’re doing this professionally, full-time, you want to look at INKResearch.com where you can get immediate type alerts when there’s insider activity going on. The screening is very valuable where you can screen through the sectors and see who’s buying in the sectors and you can be alerted when there’s insider activity going on. So depending on the type of investor you are, those are two different destinations you should check out.

Bill: And if listeners want to follow you online, I believe I pulled up your twitter, is that @teddixon?

Ted: Right, @teddixon and there’s also @canadianinsider. We’ve got two handles and the @candianinsider is a little bit more focused on the markets and insider activity. I kind of Canadian current affairs too, so take your pick.

Bill: I’m just looking here, I gotta make this comment, you joined April 2009 on Twitter, so you were an early adopter and you actually got your name as your handle. That’s very rare I must say.

Ted: There you go. Well it’s been a long time. I guess that was right around the financial crisis, people maybe had other things on their mind.

Bill: Well Ted, I appreciate you stopping by to share your insights and I do encourage listeners to go check out INK Research and CanadianInsider.com, as CanadianInsider.com in particular, that’s something that I have used for sure to track the last six months of what insiders are doing. Ted, any final comments?

Ted: Thank you bill and keep up the good work that you’re doing, I’m sure there’ll be plenty of demand for people to get more insight on how to tackle the junior mining industry in the months ahead. Yeah keep up the good work.

Bill: Thank you and let’s hope so.