The First Pillar: Buyer Behavior Matters
Buying Behavior is one of the “Pillars” of our investment process.
What we want to see is positive cash flows into a stock from individuals/institutions with clearly the best knowledge of the company and its prospects.
Except for buying during “quiet periods” when earnings are about to be announced, “insiders” (Including corporate officers, board members, etc.) are allowed to buy and sell the stock of companies in which they are involved, subject to timely disclosure. Keep in mind that different standards exist for different countries and exchanges, in terms of content and timing of disclosure.
There is a greater informational value when insiders buy their stock than when they sell.
Insiders sell for many reasons (liquidity, diversification, etc.), but they only buy for one reason – they think the stock is going higher. Based on public and non-public information, they believe favorable conditions exist to propel the stock higher.
Why else would you buy?
That said, insiders don’t have a perfect track record even with better information, and not all buys or buyers are created equally. Some things to consider:
• What is the current ownership position and background/experience of the individual/institution?
• What’s the buying/selling track record of the individual/institution?
• Is the buy/sell of a meaningful magnitude both on a relative and absolute basis?
There are other purchasers whose transactions in a stock may be notable. Specifically, certain strategic investors with stellar track records in particular sectors or industry groups. And a company buying its shares aggressively or on an accelerated basis results in a substantial reduction in outstanding shares. And, in some cases, a lack of selling by a large founder who refuses to part with shares for any reason can be meaningful.
Assessing the informational value of insider transactions is part art and part science – it often takes some experience to decipher the relevance. We would rather invest alongside these insiders who have anted up with real money and whose actions are discoverable and measurable rather than relying on Wall Street opinion.
Let's consider recent insider buying in Ulta Beauty, Inc. (ULTA), for example.
According to information on the company’s website (www.ulta.com), Ulta Beauty is the largest U.S. beauty retailer and the premier beauty destination for cosmetics, fragrance, skincare products, hair care products, and salon services.
In September 2019, one of the company’s directors, Charles Heilbronn, purchased $59 million of stock in an open market, bringing his total ownership to $480 million, or 3.4% of the stock. The last time he purchased stock was in October 2017, following a steep decline. After his October 2017 purchase, Ulta’s stock rallied over 70% through July 2019. What perhaps was most interesting, the purchase was made through Mousselluxe SARL, an entity Heilbronn uses to manage the fortune of the Wertheimer family which controls the fashion house Chanel. In 2018, Ulta and Chanel inked an agreement to bring some of Chanel’s high-end cosmetics and fragrances into Ulta stores.  Given this background and expertise, we think he has significant insight into Ulta’s business prospects and its appropriate valuation.
A powerful signal with a very high “score.”
It rarely is as easy as the above example to identify a meaningful purchase. Taken together with our other pillars, this high conviction buy provided the confidence we needed to repurchase ULTA after a fundamental hiccup that created a pull-back in the stock price, but in our opinion, did not alter the companies compelling growth thesis.
Where can investors get information?
Insiders and certain investors who reach certain thresholds are required to file with the SEC in a timely fashion. This information can be found on the SEC filing website called EDGAR (SEC.gov | Filings & Forms). However, you might be interested in several subscription services that are more user-friendly, and even provide analysis and insights into these transactions. These include Washington Service (The Washington Service), InsiderInsights (https://www.insiderinsights.com), and InsiderScore (https://www.insiderscore.com). We are not recommending any of these sites, just trying to provide information.
Investment Advisory Services are offered through Validus Growth Investors, LLC (“Validus”), an SEC Registered Investment Adviser. No offer is made to buy or sell any security or investment product. This is not a solicitation to invest in any security or any investment product of Validus. Validus does not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific situations. Intended for educational purposes only and not intended as individualized advice or a guarantee that you will achieve a desired result. Opinions expressed are subject to change without notice. Investing involves risk, including the potential loss of principal. No investment can guarantee a profit or protect against loss in periods of declining value. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader. As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.
 Public filings, Validus research.