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BDCL Still Attractive With A 19.2% Yield

Summary The projected quarterly $0.9366 dividend for BDCL will be higher than that in the previous quarter. Some of this increase is due to a quirk in the calendar, which caused three of the components of BDCL not to have their dividends included in the prior quarter. The stock is still attractive for those seeking very high yields and willing to accept the risks associated with this sector and the leverage. The ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (NYSEARCA: BDCL ) will soon be declaring its dividend for the quarter ending June 30, 2015. The dividend will be paid in July 2015. BDCL is an exchanged traded note that employs 2X leverage to generate exceptionally high yields. 41 of the 44 Business Development Companies that comprise the index portfolio upon which BDCL is based have announced dividends with ex-dates in the second quarter of 2015. American Capital Ltd. (NASDAQ: ACAS ) and Harris & Harris Group Inc. (NASDAQ: TINY ) do not pay dividends. MCG Capital Corp. (NASDAQ: MCGC ) last paid a dividend in August 2014, and is not currently paying one. The calendar helps BDCL’s dividend in the second quarter of 2015 relative to the first quarter. Capital Southwest Corp. (NASDAQ: CSWC ) pays semiannually and did have an ex-date in the second quarter of 2015. KCAP Financial Inc. (NASDAQ: KCAP ) declared a quarterly dividend of $0.21, with an ex-date of April 1, 2015 and a pay date of April 27, 2015. Its latest dividend has an ex-data of July 1, 2015, so that will not be included in the July BDCL dividend calculation, but the April 2015 KCAP dividend will. MVC Capital Inc. (NYSE: MVC ) declared a $0.1350 dividend, with an ex-date of April 23, 2015. Thus, I have included KCAP, MVC and CSWC, which were not in the April 2015 BDCL dividend calculation, in the July 2015 BDCL dividend calculation. From 41 of the 44 Business Development Companies that announced dividends with ex-dates in the second quarter of 2015, I projected that BDCL’s quarterly dividend paid in July 2015 will be $0.9366. This is an increase of 13.3% from the quarterly $0.8265 dividend paid in April 2015. Some of the increase is due to the inclusion of CSWC, KCAP and MVC in the July 2015 BDCL dividend calculation, because of the timing of their ex-dates. There were 2 components of BDCL that reduced their dividends from the prior levels. Fidus Investment Corp. (NASDAQ: FDUS ) declared a regular quarterly dividend of $0.38 and a special dividend of $0.02, both with ex-dates of June 9, 2015. Thus, it paid a total of $0.40. Last quarter, the company declared a regular quarterly dividend of $0.38 and a special dividend of $0.10 for a total of $0.48. Medallion Financial Corp. (NASDAQ: TAXI ) reduced its quarterly dividend to $0.24 from the previous $0.25. Three components of BDCL increased their dividends from the prior levels. Main Street Capital Corp. (NYSE: MAIN ), which pays monthly, declared a special $0.275 dividend, with an ex-date in the second quarter. It did not have a special dividend in the first quarter. TICC Capital Corp. (NASDAQ: TICC ) increased the quarterly dividend to $0.29 from $0.27 in the previous quarter. PennantPark Floating Rate Capital Ltd. (NASDAQ: PFLT ) pays a monthly dividend of $0.095. Prior to March 2015, PFLT paid a monthly dividend of $0.09. It might be noted that CM Finance Inc. (NASDAQ: CMFN ) declared a special dividend of $0.43 on June 10, 2015. However, that special dividend is not included in my July 2015 BDCL dividend calculation, since the ex-date for CFMN’s special dividend of $0.43 is August 28, 2015. The table below shows the weight of each of the components of the index upon which BDCL is based. The prices are as of June 24, 2015. The weights are the latest on the BDCL website. The table also shows the dividend rate, the ex-dates, and the contribution by component of the components that pay dividends. Unless specified otherwise, the components pay dividends quarterly. In the frequency column, those that pay monthly have an “m”, and the semi-annual payers are denoted by “s”. Interestingly, the second-largest component of the index upon which BDCL is based, American Capital Ltd., with a weight of 9.55%, is one the 3 components that do not currently pay any dividends. The other weights of the components that do not currently pay dividends are: TINY has a weight of 0.3%, and MCGC has a weight of 0.63%. Thus, 10.48% by weight of the components of BDCL do not pay any dividends now. Some readers have asked to see the details of my dividend calculations. I have changed my procedure, and now use the contribution by component method. It should give the exact same result as my previous method that could be called the total imputed dividends divided by the number of shares outstanding method. An example of that methodology using actual numbers can be seen in the article ” MORL Yielding 24.7% Based On Projected June Dividend “. In the total imputed dividends divided by the number of shares outstanding methodology, the number of shares outstanding appears both as a numerator and a denominator. Thus, the same result can be obtained by using the contribution by component method. This method involves multiplying the net asset value of BDCL by weight of each component with an ex-date during the month prior to the month in question, and then multiplying that product by 2 to account for the 2X leverage. That product is then divided by the share price of the component. This is an imputed value for how many shares of the component each share of BDCL represents. Multiplying the shares of the component per BDCL share times the dividend declared by the component gives the contribution by component for each component. Adding all of the contributions of all of the components with an ex-date in the month prior to the month for which the dividend is being computed gives a projection for the dividend. The index upon which BDCL is based is a float-adjusted, capitalization-weighted index that includes the Business Development Companies listed on the major exchanges. The fact that 10.48% of the companies that comprise BDCL are not currently paying dividends can be looked at with either a “glass is half full” or “glass half empty” perspective. On the bright side, there could be considerable room for an increase in the dividends paid by BDCL if those components not presently paying dividends were to resume them. On the other hand, the fact that 10.48% of the companies that comprise BDCL are not currently paying dividends could be seen as a warning that other components in the portfolio might also suspend dividends at some point in the future. BDCL has existed for about three years, which allows us to run a regression of weekly returns on it versus a proxy for the entire equity market, such as the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). This indicates that BDCL is relatively highly correlated to the equity market, with 72% of the variation in the ETN explained by the variation in SPY. Also, as might be expected with 2X leverage, the beta or coefficient that reflects the degree to which BDCL reacts to changes in the overall market is 1.9. This indicates that if SPY were to change by 1.0%, it would be expected that BDCL would change by 1.9% in the same direction. Even though it is highly correlated with SPY, problems with specific business development companies in the index and that sector in general have caused the ETN to underperform the equity markets in recent months. The relatively high yield and high beta or systematic risk is consistent with the Capital Asset Pricing Model. One wrinkle is that for investors seeking higher yields, BDCL may actually be a relatively efficient diversifier, if those investors are now heavily invested in higher-yielding instruments that are very interest rate-sensitive. Previously, I pointed out in the article ” 17.8%-Yielding CEFL – Diversification On Top Of Diversification, Or Fees On Top Of Fees? ” that those investors who have significant portions of their portfolios in mREITs, and in particular, a leveraged basket of mREITs such as the UBS ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSEARCA: MORL ), could benefit from diversifying into an instrument that was highly correlated to SPY. The UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) is highly correlated to SPY, while only 5% of the variation in daily returns for MORL can be explained by the daily variation in the S&P index. Since CEFL yields almost as much as MORL, this suggests that a portfolio consisting of both MORL and CEFL would have almost as much yield as a portfolio with only MORL, but considerably less risk. Adding BDCL to such as portfolio could result in a more efficient risk/return profile. There is an unlevered fund that uses the same index as BDCL – the UBS ETRACS Wells Fargo Business Development Company ETN (NYSEARCA: BDCS ). BDCS could also be a good investment for those who want higher yields and want to use their own leverage to do so. Buying BDCS on a 50% margin would return a higher, or at least comparable, yield to buying BDCL for those who could borrow at LIBOR or some similar level. Many retail investors cannot borrow at interest rates low enough to make buying BDCS on margin a better proposition than buying BDCL. However, larger investors with access to low margin rates might do better by buying BDCS on margin. Even some small investors could do better buying BDCS rather than BDCL, in some cases. For example, an investor might have $10,000 in a brokerage account in a money market fund and want to get at least some return by investing a small part of the $10,000 in BDCL or BDCS. Most brokerage firms pay just 0.01% on money market funds. The annual return on $10,000, at 0.01%, is $1 per year. If this hypothetical investor were thinking of either investing $1,000 of his $10,000 in BDCL and keeping $9,000 in the money market fund, or investing $2,000 of his $10,000 in BDCS and keeping $8,000 in the money market fund, either choice would entail the same amount of risk and potential capital gain. This is because BDCL, being 2X leveraged, would be expected to move either way twice as much as a basket of Business Development Companies, while BDCS would move in line with a basket of Business Development Companies. For this hypothetical investor, his effective borrowing cost is the rate on the money market fund. Thus, his income from the $2,000 of his $10,000 in BDCS and $8,000 in the money market fund should exceed that of $1,000 of his $10,000 invested in BDCL and $9,000 in the money market fund, since his effective borrowing rate on the extra $1,000 invested in BDCS is less than what the imputed borrowing cost that BDCL uses. As I indicated in the article ” BDCL: The Third Leg Of The High-Yielding Leveraged ETN Stool ,” the 44 Business Development Companies that comprise the index upon which BDCL is based are a varied lot. Medallion Financial finances taxi cab companies. ACAS manages $20 billion worth of assets, including American Capital Agency Corp. (NASDAQ: AGNC ) and American Capital Mortgage Investment (NASDAQ: MTGE ), which are mREITs that are included in MORL. Each of the 44 Business Development Companies that comprise the index upon which BDCL is based have their own specific risk factors. The power of diversification can make a portfolio now comprised mainly of high-yielding interest rate-sensitive instruments more efficient when BDCL is added to that portfolio. As I explained in the article ” 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory ,” a security or a portfolio of securities is more efficient than another asset if it has a higher expected return than the other asset but no more risk, or has the same expected return but less risk. Portfolios of assets will generally be more efficient than individual assets. Compare investing all of your money in one security that had an expected return of 10% with some level of risk to a portfolio comprised of 20 securities each with an expected return of 10% with the same level of risk as the single security. The portfolio would provide the exact same expected return of 10%, but with less risk than the individual security. Thus, the portfolio is more efficient than any of the individual assets in the portfolio. My projection of $0.9366 for the BDCL July 2015 dividend would be an annual rate of $3.7427, based on the trailing four quarters. This would be a 18% simple yield, with BDCL priced at $20.85 and an annualized quarterly compounded yield of 19.2%. If someone thought that over the next five years market and credit conditions would remain relatively stable, and thus, BDCL would continue to yield 19.2% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $240,602 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $18,100 first-year annual rate to $46,195 annually. BDCL prices and dividends as of June 24, 2015 Company Name Ticker Weight(%) Price Ex-date Dividend Contribution Ares Capital Corp. ARCC 9.95 16.57 6/11/2015 0.38 0.0961401 American Capital Ltd. ACAS 9.55 13.95 0 FS Investment Corp. FSIC 9.41 10.32 6/22/2015 0.2228 0.0855944 Prospect Capital Corp. PSEC 9.38 7.75 8/27/2015 0.0833 0.1274347 Apollo Investment Corp. AINV 6.46 7.29 6/17/2015 0.2 0.0746716 Main Street Capital Corp. MAIN 4.86 32.34 8/18/2015 0.175 0.0506532 Fifth Street Finance Corp. FSC 4.46 6.88 8/12/2015 0.06 0.0491631 TPG Specialty Lending Inc. TSLX 3.23 17.94 6/30/2015 0.39 0.0295846 Golub Capital BDC Inc. GBDC 3 16.87 6/16/2015 0.32 0.023976 Hercules Technology Growth Capital Inc. HTGC 2.98 11.84 5/14/2015 0.31 0.0328735 TCP Capital Corp. TCPC 2.84 15.49 6/12/2015 0.36 0.0278093 New Mountain Finance Corp. NMFC 2.83 14.74 6/12/2015 0.34 0.0275035 PennantPark Investment Corp. PNNT 2.74 9.25 6/11/2015 0.28 0.0349452 Triangle Capital Corp. TCAP 2.55 24.24 6/8/2015 0.59 0.0261505 Solar Capital Ltd. SLRC 2.51 18.47 6/23/2015 0.4 0.0229027 Capital Southwest Corp. CSWC 2.22 50.29 5/14/2015 0.1 0.0018599 BlackRock Kelso Capital Corp. BKCC 2.22 9.31 6/16/2015 0.21 0.0210981 Medley Capital Corp. MCC 2.03 9.34 5/18/2015 0.3 0.027472 TICC Capital Corp. TICC 1.65 6.87 6/12/2015 0.29 0.0293458 THL Credit Inc. TCRD 1.41 12.05 6/11/2015 0.34 0.0167622 Fifth Street Senior Floating Rate Corp. FSFR 0.98 10.01 7/30/2015 0.1 0.0123747 Fidus Investment Corp. FDUS 0.86 16.18 6/9/2015 0.4 0.0089578 KCAP Financial Inc. KCAP 0.77 6.15 7/1/2015 0.21 0.0110778 MVC Capital Inc. MVC 0.76 10.28 4/23/2015 0.135 0.0042051 Medallion Financial Corp. TAXI 0.75 8.72 5/12/2015 0.25 0.0090595 PennantPark Floating Rate Capital Ltd. PFLT 0.73 14.48 6/11/2015 0.095 0.0060537 Garrison Capital Inc. GARS 0.73 15.09 6/10/2015 0.35 0.0071338 Gladstone Investment Corp. GAIN 0.71 7.74 6/17/2015 0.0625 0.0072467 Capitala Finance Corp. CPTA 0.67 16.14 12/18/2015 0.05 0.0026235 Alcentra Capital Corp. ABDC 0.64 13.7 6/26/2015 0.34 0.006692 MCG Capital Corp. MCGC 0.63 4.71 8/18/2014 0 Gladstone Capital Corp. GLAD 0.56 8.1 6/17/2015 0.07 0.0061171 Stellus Capital Investment Corp. SCM 0.56 11.88 6/26/2015 0.1133 0.0067506 Solar Senior Capital Ltd. SUNS 0.53 16.2 6/23/2015 0.1175 0.0048589 Monroe Capital Corp. MRCC 0.52 14.9 6/11/2015 0.35 0.0051464 TriplePoint Venture Growth BDC Corp. TPVG 0.49 13.24 5/27/2015 0.36 0.0056135 American Capital Senior Floating Closed Fund ACSF 0.45 12.73 7/22/2015 0.097 0.0043341 Newtek Business Services Corp. NEWT 0.41 18.25 6/25/2015 0.47 0.0044488 Horizon Technology Finance Corp. HRZN 0.4 12.7 8/17/2015 0.115 0.0045782 OHA Investment Corp. OHAI 0.36 5.75 6/26/2015 0.12 0.0031655 OFS Capital Corp. OFS 0.31 12.39 6/12/2015 0.34 0.0035842 Harris & Harris Group Inc. TINY 0.3 2.77 0 WhiteHorse Finance Inc. WHF 0.3 12.85 6/17/2015 0.355 0.0034919 CM Finance Inc. CMFN 0.29 13.5 9/16/2015 0.3469 0.0031397 Total 0.9365937 Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long BDCL, MORL, CEFL AGNC. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

How To Analyze Insider Selling

Summary Insider activity can be an extremely valuable tool when analyzing an investment. Insider buying is typically straight-forward, while insider selling is trickier to analyze. Insider sells should be analyzed by their size and frequency, the number of insiders selling, and insiders’ overall holdings and wealth. First Solar in 2007 – 08 provides a classic illustration of how large amounts of insider selling can be a red flag. If you told me that I had to invest in a portfolio of any 10 American companies for the next 3-5 years and I was only allowed to look at one metric or one data piece to make my decision, the choice would be a simple one. There’s no metric that can tell you more about a company that insider activity. In a world where corporate officers and directors are coached to “spin” their performance like politicians and are often incentivized to exaggerate results, insider activity lets you cut through the bullcrap and see what officers and directors of the company truly believe. Insider activity is often under-utilized by investors. Two likely reasons for this: (1) it’s inconclusive in the vast majority of cases and (2) it’s sometimes difficult to analyze. If you gave me a random sample of 100 companies, it’s likely that we would not be able to form a legitimate preliminary thesis on any more than 20 of these companies. And that’s being generous. In reality, no more than 3-10 will likely have significant activity in either direction. Yet, the few cases where there is significant insider activity provide us more insight than any other metric or data point out there. Analyzing insider buys can be reasonably straight-forward. If you see 2+ officers or directors buying significant amounts of shares at prices similar to the current stock price in the past six months, that’s generally a good sign. It means that these key individuals believe the company’s stock is undervalued and represents a good bargain. Of course, anyone can be wrong even about their own company, so it’s no guarantee of superior performance. Nevertheless, insiders know more about the company than anyone else and while their buying might not tell you much about macro conditions or the future price environment for their products, it does tell you what the insider think about their own company’s relative position. In most cases, that’s quite valuable information. Insider selling, however, is a much trickier piece of data to analyze I’ve heard many individuals discount the idea of looking at it entirely, but I think this is because people often find themselves frustrated with complex data series. Insider sales can be quite meaningful if you know how to analyze them. Diversification of Assets The first thing to note with insider sales is that they aren’t automatically “bad news.” Many insiders sell shares for perfectly legitimate reasons that have nothing to do with the stock’s valuation or company fundamentals. Put yourself in the shoes of an executive that has 90% of his or her wealth invested in one company. No matter how much you believe in your company and no matter how much of a bargain you believe the stock to be, it still makes sense to diversify a bit, so if the worst case scenario does happen, you still have a considerable bit of wealth. For this reason, it should be no surprise that executives at companies that have had good runs sell out of some of their shares in order to diversify wealth. Likewise, many executives and directors simply have other uses for the cash. This could include investments in other potential business opportunities, philanthropy, or real estate purchases. Indeed, it’s fairly common for high-level company stakeholders to sell shares, and that’s why insider selling can be tricky to analyze. This doesn’t mean it’s impossible, however. Insider Dumping There are several pieces of data to analyze when examining insider selling. I focus on: (1) Size of insider sells, (2) The number of insiders selling, (3) Frequency of selling activity, (4) Insider buys, and (5) Insider sells relative to total inside ownership Companies with consistent insider sells of large amounts by at least 3+ officers or directors, with little or few offsetting buys are the ones that give me cause for skepticism. This is particularly true with a company where inside ownership is fairly low to begin with (e.g. 2% – 3% of outstanding shares). That a director might need to take money out now and again is no surprise. Several officers and directors taking out large amounts of money in a short time frame, on the other hand, indicates a general pessimism on the company’s future stock prospects. Even in the odd event that company execs are selling large numbers of shares and the stock is undervalued, it would lead me to question management’s abilities. Management has a greater level of knowledge on a company than anyone else. If management can’t tell when their own stock is a good bargain, I have to suspect that they are also not good at understanding value in their own business, as well. Example #1: American Capital (NASDAQ: ACAS ) The reason this topic was on my mind was an excellent article from Stanislav Ermilov on American Capital . Stanislav’s thesis is that there is considerable hidden value at ACAS. He believes that once they spin off some of their assets, the much of that value will be unlocked. I found Stanislav’s case compelling enough to start looking at it myself. The first thing I did, naturally, was take a look at insider buying activity . I reasoned that if the officers of the company understood the “hidden value”, there would likely be a few that had been buying the hypothetically undervalued shares. Unfortunately, what I discovered was the exact opposite: officers have been dumping shares like mad. (click to enlarge) The screenshot above shows the past couple of months, but the track record of insider selling has been consistent over the past few years. Since December 2012, I estimate that there was a total of over $80 million in insider sales by at least 7 different officers and directors. Almost all of these sales have come at prices close to the current market price. I see no insider buying activity at all. No matter how compelling the thesis for ACAS might seem, I have to think there are some significant risks being missed. Unless Yahoo Finance is inaccurate (and it sometimes is), it also states that there is only 2% inside ownership for ACAS, which has a market cap of about $4 billion. 2% of $4 billion is $80 million. In other words, the insiders have sold off nearly half the shares in the past two years. I’m not necessarily suggesting that ACAS’s management is poor. Given that they make a lot of higher-risk investments, the company’s value would naturally suffer in market downturns. Perhaps, management merely thinks we’re near a cyclical peak. It is worth noting, however, that the stock lost 97% of its value during the last financial crisis. I have no opinion on ACAS and have done little research, but I know that the insider selling alone is enough to keep me away from it, even with a compelling “buy” thesis. Example #2: Zillow (NASDAQ: Z ) I’ve been skeptical of Zillow’s valuation for quite awhile. Indeed, I wrote an article, ” 7 Reasons Why Zillow is Extremely Overpriced ” back in August 2013. At the time I penned the article, Zillow sold for around $91 per share. As I’m writing this, it sells for $103, which is arguably a poor return over that 16-month period (13.1% versus 23.1% for the S&P 500), but hardly disastrous. However, this ignores the wild ride it’s taken in that timeframe, skyrocketing to $160 back in July, before plunging down to its current price. My thesis on Zillow hasn’t changed one bit. It still looks significantly overvalued to me at over 14x revenue, it is at best a break-even company, and its competitive position is weaker than typically imagined by investors (an issue repeatedly hammered on by short-selling outfit , Citron Research). Nevertheless, I’ve never recommended shorting it for precisely the reasons elucidated in the famous J.M. Keynes quote: ” the market can stay irrational longer than you can stay solvent .” While there are numerous reasons I view Zillow’s stock as overvalued, the insider sells paint a story that the officers of the company believe it’s overvalued, as well. Assuming my data is correct, I calculated over $1.4 billion in insider sales over the past 2 years, with a large chunk coming at lower prices than the current one (with the selling spree beginning around $40). The current market cap of Zillow is $4.2 billion, so the total insider selling amounts to 33.3% of the company’s current value. There are some differences between Zillow and ACAS. For one, the officers and directors of Zillow owned a much larger percentage of shares than their equivalents at ACAS. Moreover, it’s likely that many of the major stakeholders had a significant bit of their wealth tied up in Zillow. At the same time, once an officer sells over $20 million in shares in a few years, you have to think they have a pretty sizable cushion of safety and that insider selling becomes a statement on the value of the stock, rather than merely a “diversification strategy.” Even if 50% of your wealth is tied up in one company, that’s not a huge deal when your total wealth exceeds $50 million. I have and continue to view Zillow’s massive insider selling as a signal for long-term shareholders to get out until the price has significantly corrected; below the $50 range at a minimum. I personally wouldn’t even consider it unless the price fell below $35. Example #3: First Solar (NASDAQ: FSLR ) in 2008 Thus far, I’ve given you two current examples of stocks where the insider selling activity raises questions about valuation risks. But I also want to give you a historical example where massive insider dumping was quite predicative of an eventual crash in a stock. First Solar in 2008 is one of the most dramatic examples I can recall. First Solar peaked at over $310 in May 2008. It gave up 72% of its value in six months, plunging all the way to $87 in late November 2008 before rebounding. Since that point, it continued to lose value till bottoming out in June 2012 around $13. Today, it’s trading back at $44 meaning that if you bought at the peak and held, you would’ve lost over 85% of your investment. (click to enlarge) The dramatic insider selling activity in FSLR in 2007 and 2008 was a clear message that the stock was significantly overvalued. From May 2007, when FSLR sold in the $60 – $70 range, till August 2008, before the stock crashed, there were over $1.5 billion in insider sales. While that figure might arguably be inflated due to sales by the Estate of John T. Walton, there was considerable activity amongst the executives, as well, with CEO Michael Ahern selling over $350 million in shares in that 15-month window. When an executive holding a massive stake in his or her own company sells off $5 or $10 million in a year, it’s reasonable in many cases to assume that he or she is diversifying their portfolio. When he sells off $350 million, that’s a statement on the value of the stock! Conclusions In most instances, insider activity doesn’t tell us much about a stock. For the average company, there is little activity, or a handful of small sells. In the few instances, however, where there is a significant amount of insider activity, it can tell us quite a bit about management’s perception of valuation. Insider buying is relatively straight-forward to analyze. Significant buys by multiple insiders show that the people running the company have confidence in their performance and view the stock as undervalued. Insider selling is much trickier to analyze, but an equally valuable tool. In most cases, the activity that you see will be inconclusive at best. However, when there is significant activity, it should be analyzed by the size and frequency of sells, the number of insiders selling, and the overall context (e.g. overall stake in company by insider, portion of total wealth, relationship to company). When you see a clear and consistent pattern of share dumping by officers and directors, this is more often than not, a clear indication that a stock is overvalued.