Friday Addition Edition- Buying High

It has been an interesting week, to say the least. The whole GameStop (GME), Redditt, and Robinhood saga has been one of the most fascinating events I have ever seen. The WallStreetBets Redditt group has gone from 1.8 million members to 6 million this morning. The financial world is watching, and it seems like a lot of them are jumping into the game GME is back up more than 100 points this morning, regaining much of what it lost yesterday.

Other heavily shorted stocks have joined the party, with AMC (AMC) leading the group's pack of secondary picks.

Reading the WallStreetBets forum is somewhat surreal. It is very much and us against them atmosphere with an almost revolutionary feel at times. Here are some recent posts to give you some flavor for the missionary zeal of these folks:

Put in what you can lose and help make Wall Street bleed retards. We control the market now.

Put as much pressure on the shorts as possible! BUY BUY BUY AND HOLD HOLD HOLD!!!!

The time has come we can no longer sit back and wait to make you're voices heard through AMC and GME. History is in you’re hands we either going to be fucked by Wall Street once again or finally stand up AND SAY F*** WALL STREET it’s time for people to take what’s rightfully there’s. The day is still young don’t lose Faith when the day is over, Wall Street will be in shambles. My friends hold you’re head high will win this war next destination Mars.

It is one of the craziest things I have ever watched.

The aftermath will be equally fascinating, with implications for the future of trading.

Is there collusion on the site to manipulate trading?

Is it ethical for brokerages to restrict trading in certain securities?

Can a class action suit succeed even though everyone involved approved the terms and conditions of having an amount at the various firms involved?

Is there a first amendment aspect to the case?

It will all be interesting to watch as it unfolds.

While this madness has dominated the week, something else has been happening that is also worth our attention. Insider buying has dried up as insider selling is reaching levels not seen in over a decade. The ratio of buyers to sellers is as low as I have ever seen it.

Yes, that does say something about the stock market's condition, but it is an anecdotal comment, not a definitive statement. The low level of the ratio is a statement that corporate insiders do not think the market is undervalued. It is not actionable. It is just information that is part of a much bigger puzzle.

What may be actionable is looking at those few stocks that insiders are buying this week. Weihai Li, Wesley Wang, Zhipeng Yan, and Qunzi Zhang published a study in 2019 titled “Trading Against the Grain: When Insiders Buy High and Sell Low.” They found that insiders usually buy near 52-week lows and sell near 52-week highs. When they go against that grain, excess returns are possible. Insider buys near 52-week high were much more profitable than those made near lows.

CEO Bryant Riley has been a steady buyer of B. Riley Financial has been consistently buying shares of his company throughout much of 2020. He has not stopped buying as the stock is hitting new highs in 2021. He has spent $7 million so far in January to buy more than 160,000 more shares of stock.

This is a fascinating collection of businesses. The most significant part of the business is the capital markets division that conducts its investment banking, research, brokerage, wealth management, and advisory company. I have long considered B. Riley to be one of the best research firms in the business. My opinion only went improved when they bought FBR back in 2017.

B. Riley also has an auction and liquidation business that helps close businesses and liquidate assets. They have a valuation and appraisal business that values businesses. They also have a principal investment business that acts much like a private equity fund or merchant bank.

As you well know, I like to buy low and sell high, but the continued aggressive buying by the CEO has me considering the merits of a long-term purchase in B. Riley Financial.

It is worth spending some time on their website to learn more about this company. I think the long term future of this company is fantastic.

This next company is not trading at 52-week highs but is well off the lows. The CEO of Intel (INTC) made a $1.5 million purchase of stock this week. The CEO kicked in another $500 thousand. They both have a tone of stock already as well as millions of dollars' worth of equity incentives and stock options, so the buying is intriguing.

Morgan Stanley and Cowen both raised their opinion and price targets on the stock this month.

I probably won't do anything with this one, but if you are looking to add big tech at a 10 PE to your portfolio, this might not be a bad way to do so.

Posted to Banking on Profit on Jan 29, 2021 — 2:01 PM
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