Finding Penny Stocks through Insider Trading Activity
Penny stocks, defined as stocks trading under $5 per share, offer traders huge upside potential but also carry significant risks. One strategy used by some investors to identify promising penny stocks is tracking insider trading activity through SEC filings. Insiders like directors and officers are privy to material nonpublic information that can give them an edge in timing their trades.
Monitoring what insiders are buying and selling can provide clues for picking potential winners before major moves. However, while insider transactions can be informative, this approach has limitations and requires thorough vetting.
This article explores using insider activity to find penny stocks, along with the risks, rewards, and best practices for making sound investments. We also take a closer look at a handful of penny stocks to watch after recent bouts of insider buying.
How Insiders Legally Trade Stock in Their Own Company
Corporate executives, board members, and large shareholders are considered insiders of public companies. Under securities laws, it is illegal for insiders to trade stock based on material nonpublic or confidential information that could impact share price once it becomes known publicly. However, insiders can legally trade as long as certain protocols are followed.
Common ways insiders execute legal stock transactions in their own company include exercising employee stock options as part of compensation packages. These are scheduled transactions that follow predefined rules about timing and amount of shares traded. Another method is selling shares according to 10b5-1 pre-set trading plans that establish future trades at a specific time. This is meant to avoid accusations of trading on insider knowledge.
Insiders may also make buys or sells based on publicly available information or immaterial events unlikely to move the share price significantly. Finally, they can execute trades based on data provided by an independent source, not obtained through the insider’s role.
Despite following these guidelines, the SEC still scrutinizes insider trades closely for any hint of illegal activity. But when done properly, monitoring legal insider transactions through SEC disclosures can help identify promising penny stocks.
Penny Stocks To Watch
- Lexicon Pharmaceuticals (NASDAQ: LXRX)
- Intrusion Inc. (NASDAQ: INTZ)
- Rain Oncology (NASDAQ: RAIN)
Lexicon Pharmaceuticals (LXRX)
Lexicon specializes in gene targeting, including discovering and developing medicines to treat various diseases. Treatments have a wide range of focus, including heart failure, neuropathic pain, diabetes, and metabolism indications.
Shares of LXRX stock have been on the rise ever since the company announced that Express Scripts determined that it will put INPEFA on its Premier Access and Premier Performance formularies, nationally. This was discovered using Lexicon’s gene science platform. Lonnel Coats, Lexicon’s chief executive officer said, “We have been working towards this achievement and hope to continue this momentum with additional significant progress towards broad access to and coverage for INPEFA.”
– Penny Stocks To Buy Now? 8 To Watch With Unusual Options Action
This week Lexicon is also presenting at an industry conference. The company will be at the Academy of Managed Care Pharmacy Nexus Meeting in Orlando. Lexicon will have findings from two studies on INPEFA on October 17. Ahead of this event, insiders have also started getting more active. Director Raymond Debbane picked up a total of 1 million shares of LXRX stock at prices ranging from $1.02 to $1.19.
Intrusion Inc. (INTZ)
Another one of the names on this list of penny stocks with insider trading is Intrusion. The company specializes in cyber-attack prevention solutions and recently announced a multi-million dollar award, which has helped give a boost to momentum in the penny stock.
Last week Intrusion won a $5 million agreement with “a large telecommunications provider” to use its Intrusion Shield for its data centers. Tony Scott, CEO of Intrusion, explained, “We’ve seen an increase in the targeting of data centers for numerous businesses around the world, and this award is evidence of the effectiveness and capabilities of Intrusion Shield at scale. With this award and the other four new contracts across diverse industries we signed in the third quarter, we see signs that our go-to-market strategy with partners is working.”
While shares of INTZ stock have pulled back in recent sessions, news of insider trading have stoked some new interest this week. A 10% owner, Raymond Hyer, is the latest to buy shares of INTZ stock. The insider reported purchasing just over 306,000 shares at prices ranging from $0.32 to $0.341.
Rain Oncology (RAIN)
This week Rain Oncology is gaining attention for several reasons, one being insider trading. The other is related to Rain’s latest headlines. The company kicked off the week with news that it received an unsolicited proposal from Concentra Biosciences to be acquired.
The proposal was from Tang Capital on behalf of Concentra and outlines the buyout at $1.25 per share. Now the deal is in the hands of Rain’s Board, who will review the proposal.
Late last week, 10% owner, Kevin Tang purchased 284,145 shares of RAIN stock. This was the second reported purchase by Tang this year. He picked up just under 1.1 million shares in May at an average price of $1.06. Yes, he is also the sole manager of Tang Capital Management, the firm that brought this proposed deal to Rain Oncology.
How to Analyze Insider Trading Disclosures to Find Penny Stocks To Buy
All insider stock purchases and sales must be reported to the SEC within two business days on Form 4. These filings are public information that can be accessed from various free online sources. Savvy penny stock traders carefully comb through recent Form 4 data to spot noteworthy buying or selling. Signs that insider activity may signal a penny stock opportunity include multiple insiders buying shares close together.
This demonstrates a consensus that the stock is undervalued. Large, abnormal purchases that significantly expand an insider’s total position also indicate strong confidence in future growth. Additionally, buying by insiders new to the stock, rather than existing shareholders only averaging down, signifies that fresh money sees value. Purchases made despite significant insider selling in recent months could mean insiders consider shares underpriced.
An increase in both the number of insiders trading and share volume traded compared to normal activity is another positive sign, as more participants buying is encouraging. Finally, trades shortly before scheduled earnings announcements or conference presentations may signal good results ahead.
– Overcoming Common Penny Stocks Trading Mistakes
If insiders at penny stocks exhibit these types of buying behaviors, it may signify major events or improvements not yet reflected in the share price. Carefully researching what insiders know and tracking their transactions can lead to discovering winners.
Risks and Rewards of Using Insider Data for Penny Stocks
While insider moves can produce huge stock gains, this strategy also has drawbacks and uncertainties to consider. There is no guarantee insiders are correct in their assessments of the company’s prospects or stock value. Their trades may fail to generate returns. Information driving insider trades could already be circulating among institutional investors, limiting additional upside.
Other factors like overall market conditions may outweigh any positive implications of insider buying when it comes to share price performance. Insiders could be trading for reasons unrelated to the company outlook, like liquidity needs or portfolio diversification.
Despite these limitations, insider trading activity remains a useful tool for identifying promising penny stocks. The key is using it as part of a holistic research process rather than blindly mimicking insider moves.
