Walking the Walk: When the Money Talks


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Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He also is CEO of Heartland Funds. He has 16 years of industry experience, 13 at Heartland.

Troy McGlone

McGlone, CFA, is a Research Analyst. He has 8 years of industry experience, 2 at Heartland.


Will Nasgovitz: Hi. Thanks for tuning into the March 2017 Nasgovitz Notes.

Boy, where has the time gone? We just celebrated the 8-year anniversary of the March 2009 low in the stock market. That was driven principally by the financial crisis that really boiled over in the fourth quarter of 2008 and led to a horrific recession that did not see the U.S. economy trough until February 2010, believe it or not.

I apologize for bringing up those tough economic and stock market related times, but I think that sets a stage—a good backdrop—for a question that we’re getting from investors routinely: Where are there opportunities?

And today we want to really amplify on one of our Principles of Value Investing™. We have 10 of them, but one that really sticks out to us is looking at capable management and insider ownership because we take the view if the chairman of the board, or other directors, or other officers of the company are taking their own capital and buying stock in their company, their interests are aligned with us.

So with us I have Troy McGlone, who has been with us for the last couple years, who focuses the lion’s share of his time on company-specific research, but has really upped our game when we look at the levels of insider activity across the marketplace—and what it could mean for future returns.

So, thanks for joining us Troy. 

Troy McGlone: Thanks, Will.

Nasgovitz: This first graphic looks at the broader activity. What stands out to you?

McGlone: This chart here:

Insider Buying/Selling

Heartland Advisors Value Investing Market Insight Insider Ownership Chart

Source: FactSet Research Systems Inc. and Heartland Advisors, Inc., 6/1/2014 to 2/28/2017. Buy/Sell Ratio includes all publicly-traded U.S. Companies with a market capitalization greater than $75 million and assigned a GICS sector designation. Past performance does not guarantee future results.

  • The vertical bars in black would indicate the ratio of insider buying activity relative to selling activity. The higher the bar the better in our mind.
  • If you look at the horizontal line, this is kind of the long-term trend. It’s the median of the ratio. So what sticks out would be that for every buy transaction there’s typically more than three sell transactions. And so we’re looking for major changes.
  • The green line here shows the price performance on a one-year forward basis of the S&P 500—just to give you a general sense as to the trends in a broader market indice. And what sticks out is when the ratio is low, typically it’s somewhat of a contrarian indicator, when managers are buying less than their selling. 

As an example, in 2015, the market actually struggled. So insiders weren’t very bullish on their company fundamentals relative to market expectations of the price of the companies. The market was down double digits at one point at that time.

If you fast forward to 2016, we saw this ratio spike almost 2x that longer median trend, and that was actually representative of a great buying opportunity. And the forward market performance was very strong in 2016. After a challenging start to the year, the market ended up at roughly 20%, much greater than longer-term averages.

Nasgovitz: Great context on the last couple years.

All of our 10 Principles™ are critical when we think about allocating your capital in terms of outpacing our peers and outpacing our benchmarks over the long term.

But today, insider ownership—given that there’s been a lack of it and that historically, or here recently, we’ve seen that being perhaps a precursor to outperformance in particular groups—that’s something we’re going to continue to monitor here as the quarter closes out, as the year progresses, etc.

So, thanks for tuning in. We look forward to updating you on future capital market related themes as the year progresses. Thanks so much.    

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