Watching Penny Stocks? Keep an Eye out for Legal Insider Trading
When constructing a watch list of penny stocks, it is wise to closely monitor any legal insider trading activity. Though the rules surrounding insider trades are complex, legal filings by company executives and directors can act like signals for savvy penny stock investors.
What are Penny Stocks?
Penny stocks refer to shares of small public companies that trade at low prices per share, often under $5 or even under $1. These cheap and more speculative stocks come with additional risk compared to regular exchange-traded stocks. The companies issuing penny stocks often have limited operating history, modest revenue streams, and limited publicly available financial data. Prices of penny stocks can swing wildly on low daily trading volumes due to the smaller market capitalizations.
Creating and Maintaining a Watch List
Serious penny stock investors will create and maintain a continuously updated watch list. This watch list contains penny stocks identified for their potential for growth, disruption, or being undervalued. Carefully tracking stock news, company filings, price movements, and trading volumes for cheap stocks on a daily watch list helps investors make timely decisions on when to buy or sell shares. Savvy investors will also monitor penny stock message boards and Reddit threads related to their watch list names.
What Constitutes Legal Insider Trading?
Company insiders like executives, directors, and large shareholders often receive considerable compensation in the form of stock and stock options. These insiders can legally trade their company’s stock on the open market under certain conditions. The trades must happen during prescribed insider trading windows set by the company. More importantly, the insiders must not possess any non-public or confidential information that could impact the company’s share price when deciding to buy or sell stock.
How and When Insiders Must File Trade Reports
Insiders are required to report any trades of their company’s stock to the United States Securities and Exchange Commission (SEC). These transaction filings are submitted on SEC Form 4 and include details like the trade date, the number of shares bought or sold, the price, and updated total holdings. This allows investors to look up and view insider transactions as they occur. The SEC makes insider trade filings searchable in its EDGAR database available on the SEC.gov website.
In addition to reviewing individual Form 4 filings, investors can also view aggregated and summarized legal insider trading data. This provides a quicker snapshot of total insider trades. But digging into the individual Form 4 SEC filings allows observant investors to analyze details like the timing of trades, which insiders are trading, and overall trade patterns.
Why Legal Insider Trading Activity Matters
Corporate insiders may sell shares for many reasons not related to their personal outlook on the company, like diversifying assets or raising cash for other needs. However, insider purchasing activity most likely signals that these executives and directors are confident about the company’s future growth prospects. Especially bullish is when multiple corporate insiders are all buying shares around the same timeframe. This often indicates insiders feel the stock is undervalued and possesses upside potential.
Therefore, noticeable upticks in legal insider buying can act as a positive indicator for penny stocks an investor has on their watch list. It may signify an opportune entry point for building a position in that stock. On the other hand, a noticeable increase in insider selling activity may mean insiders feel the stock price is overvalued or that negative news may be on the horizon. Heavy insider selling could be interpreted as a warning sign for a penny stock on one’s watch list.
Importance of Treading Carefully
It is crucial for investors to remember that legal insider stock transactions represent just one data point to incorporate into analysis and investment decision-making. While sometimes useful, insider trades should never become the sole basis for buying or selling a stock. Conduct thorough and balanced due diligence before ever investing in speculative penny stocks to buy.
Use a blend of qualitative and quantitative analysis like financial reports analysis, stock price charting, company news and press releases, sector and competitor analysis, and insider activity monitoring. Having a diversified methodology allows looking at stocks from multiple angles. Avoid putting too much weight on any single factor, including insider trades, when researching penny stocks.
Insider Trading Data as Part of a Penny Stock Watch List Strategy
In summary, regularly monitoring legal insider stock buy and sell transactions can assist investors with better timing entry and exit decisions for penny stock positions. Carefully adding stocks with repeated and significant insider buying to one’s watch list might uncover diamonds in the rough with upside potential.
At the same time, viewing spikes in insider sales as red flag warnings can help manage risks and limit potential downside. Use insider activity monitoring as part of a balanced penny stock research process, not in isolation. Maintain diligence, patience, and discipline when incorporating insights from following insider trades into watch list and trading strategies.
Penny Stocks To Buy According To Insiders
Bionomics Ltd. (BNOX)
One of the biotech penny stocks to watch this month is Bionomics. Thanks to a surge in trading activity following a series of headlines, BNOX stock has shot higher. Bionomics reported that it observed positive topline results from a Phase 2b ATTUNE trial of its BNC210 in treating PTSD.
“We are excited about the results of the ATTUNE trial that delivered a positive dataset with treatment effects considerably higher than currently approved therapies. We believe these results will enable FDA discussions for the registrational path of BNC210 in PTSD, which in an indication with high unmet need”, said CEO Spyros Papapetropoulos, M.D., Ph.D.
The promising data prompted analyst firms like Maxim Group and HC Wainwright to adjust ratings and price targets. Both now have a Buy rating on the penny stock. HC carries an $8 BNOX stock forecast price while Maxim’s $10 target was recently increased from $7.
That data has also brought attention from institutional funds. While it isn’t necessarily “insider” buying, it is a notable purchase action from a popular firm run by fund manager Steve Cohen and his Point72 Asset Management. The firm recently reported an updated holding of 8.1% of BNOX stock, equating to just over 119 million shares.
ARS Pharmaceuticals (SPRY)
Biopharmaceuticals company ARS Pharmaceuticals has been a comeback story over the last few weeks. The company’s focus is on developing candidates for patients with severe allergic reactions that could lead to anaphylaxis. Last month the company received a complete response letter from the FDA, which led to the plunge in price from over $7 to below $2.60.
In the letter, the FDA wanted the company to complete a pharmacokinetic/pharmacodynamic study in repeat doses of ARS’ neffy compared to an epinephrine injection product. CEO Richard Lowenthal expressed concern about this decision as well, stating, “We are very surprised by this action and the late requirement at this time to change the repeat-dose study from a post-marketing requirement, which we had previously aligned on with FDA, to a pre-approval requirement, particularly given the positive Advisory Committee vote. In fact, multiple Committee members highlighted the favorable profile of neffy in our completed single-dose nasal allergy challenge study and that any decline in exposure 20 minutes after dosing, after the expected response period, is of no concern.”
Needless to say, it hasn’t been a lasting downtrend but a swift one, regardless. SPRY stock has bounced back to highs of over $4 within the last few weeks. The company has also seen insider buying to the tune of hundreds of thousands of dollars in SPRY stock.
Since September 21, insiders, including RA Capital Management and Chief Legal Officer Alexander Fitzpatrick picked up shares. The bulk was accounted for by RA. The fund purchased a total of 2.7 million shares purchased at prices ranging between $2.75 and $3.90. Fitzpatrick purchased a modest (in comparison) total of 86,258 shares of SPRY stock at prices ranging from $3.60 to $3.85.
Planet Labs (PL)
Like many of the notable names in the stock market in 2023, Planet Labs has faced tremendous headwinds over the least several months. At one point, shares of PL stock traded as high as $5.18 but the last 2 consecutive earnings updates have not made it easy for the penny stock to return to those levels.
In its most recent earnings report, the data insights company recorded an earnings per share and sales miss for the Fiscal 2023 second quarter. The company also lowered its fiscal year guidance, which put more pressure on the stock during September. With this in the rearview, traders may be focusing on its prospects, some of which were discussed by CEO Will Marshall in the September earnings update. Marshall explained, “his quarter was one of increasing focus and operational efficiency. Revenue for the second quarter of fiscal 2024 was in line with our expectations, while gross margin and Adjusted EBITDA outperformed for the quarter,…We completed the acquisition of Sinergise, aligned our teams and resources behind our top priorities, and made significant progress on the development of our next generation satellite fleets. We continue to feel the market tailwinds and the pull from customers for the insights that our solutions enable.”
In the meantime, insiders have been purchasing shares during the onslaught of selling. The most recent buying has come from CEO Marshall. He bought 100,000 shares of PL stock at an average price of $2.70 during the second half of September.
Additional Relevant Considerations About Penny Stocks With Insider Trading
A few other relevant points to keep in mind when tracking insider trades for penny stock watch list ideas:
- Focus on trades by C-suite executives and board directors, not lower-level insiders. The top leaders likely have the best grasp of the company’s pipeline and future prospects.
- Look for consensus buying across multiple insiders rather than just isolated trades. Widespread buying suggests agreement on upside potential.
- Monitor sites tracking illegal insider trading allegations and SEC investigations. Avoid companies with red flags.
- Research the company’s policies on insider trading windows, blackout periods, and Code of Ethics. More stringent policies indicate tighter controls.
- Make sure to screen penny stocks for minimum liquidity before investing. Even with optimism, very thinly traded companies come with extra risks.
- Don’t forget to examine company financial reports in addition to insider trading. Look for improving fundamentals.