Postcards from the florida republic: An independent and profitable state of mind
If I hopped a charter from the Florida Republic to Tampico, Mexico, it’d be a 917-nautical-mile trip.
So, I’d need a confident captain.
I want someone who knows the boat. Someone who has traveled in the Gulf of Mexico and can navigate any weather surprises along the way.
In the stock markets, there are similar captains of industry.
These executives understand the conditions that affect their worlds. So, to find that confident captain with the chops to get your hard-earned capital into a safe harbor, you need to follow insider buying.
Here’s how it works and why it’s so consistently reliable…
When CFOs Buy Their Own Stock, You Can Win
First, we need to draw a big, bright line and make sure we’ve got our terminology right. We’ve got insider trading and, what we’ll talk about today, insider buying. They’re very different.
Insider trading – buying, selling, or trading a stock when you have non-public, material information – is, for the most part, illegal.
Insider buying is nothing like insider trading. There’s nothing illegal about an executive purchasing their own stock. Executives – like CEOs and CFOs – put down their own money and file a Form 4 document with the SEC.
Each day, I track the buying and selling of shares by all kinds of executives, but there’s no one I follow more closely than the Chief Financial Officer (CFO).
When the CFO buys his or her own stock, it’s like a ship captain eager to jump on board the ship. No one knows the financial conditions of a company better than the CFO. They know all the ins and outs of a company’s financials – just like a captain knows the power and speed of the ship. When a CFO invests, it’s an unequivocal statement of his or her confidence in the company’s future and direction.
When they’re buying the stocks, particularly beaten-down shares, they’re expecting the storm clouds on the horizon to dissipate. They’re expecting smoother sailing.
Of course, this doesn’t mean that you should buy every stock that a CFO purchases. You can’t just invest in the ship because the captain is confident. More due diligence is called for.
Investors Need to Know Macro and Momentum, Too
Now, before you pick the CFO you want to follow into a stock; you have to consider some market conditions.
First, momentum conditions - these tell us if money is flowing in and out of the equity markets. When momentum turns negative, it could signal a dramatic selloff in the market like the 20% drop we saw on the S&P 500 in December 2018, the 33% dip in March 2020, the 11% drop we experienced in June 2022, and the sharp drawdown we got in March of this year.
CFOs are not market timers. They believe that the stock is undervalued now. But in a weakening equity market – the stocks they purchase can decline quickly. Many financial-sector CFOs purchased their shares in March 2023 during the banking crisis, and shares are still under their purchase price.
Also consider this: If you’re tracking CFO buying, it’s important to look at the aggregate of buying. When CFOs stop buying their stocks, it can signal that these financial executives – plenty of whom are MBAs and CFAs - don’t see value in their stocks right now.
If you see few buyers in the aggregate, it signals that the larger crowd of CFOs doesn’t really see value in the broader market.
The chart below is all, and I mean all, of the CFOs’ insider buying across the equity markets in the last 10 days.
There are only six purchases, and the deals are minimal. My research indicates that buys over $60,000 are the most statistically significant. No such purchases exist at this moment.
The trend of weak CFO insider buying over 10 days could signal more risk-on activity as we kick off the second half.
See you out there,
Garrett Baldwin
Florida Republic Capital (Available on Substack)
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.