What Executive Stock Buys Really Signal

When Nike $NKE ( ▼ 0.32% ) shares slid sharply in December, a familiar name stepped in.

Nike director Tim Cook (you may know him better as the CEO of a little firm called Apple $AAPL ( ▲ 1.54% )) bought about $3 million of Nike stock. Other insiders followed, including CEO Elliott Hill. The show of confidence helped lift shares back toward pre-selloff levels, at least temporarily.

That pattern is common. A Wall Street Journal analysis of roughly 1,400 large insider purchases at S&P 500 companies over the past five years shows that most buys come after a stock has already fallen. About 69% were made following negative one-month performance, often after bad earnings or adverse news. Executives frequently buy in clusters to amplify the signal.

Conventional wisdom would say that, when insiders snap up their own stock, they may know something that makes it worth watching for everyday investors as well. But does that hold true against the data? Only to a point.

Stocks rose a median 2% in the month after insider purchases, according to data from Verity.

Yet just 15% fully recovered to where they traded before the prior decline. As Verity’s head of research put it, the bullish effect tends to wear off.

Examples vary widely. Insider buying at Intel $INTC ( ▼ 1.14% ) and Netflix $NFLX ( ▲ 2.17% ) initially steadied shares but failed to stop longer-term declines.

Other cases, like Carnival $CCL ( ▲ 1.4% ), saw full recoveries. But many, including Caesars Entertainment $CZR ( ▼ 3.02% ) and PayPal $PYPL ( ▼ 0.19% ), did not.

Insider buying often signals conviction, not precognition. It may spark a bounce, but what comes next will typically rely on the fundamentals.