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Dudley Baker

Dudley Baker

Dudley Pierce Baker is the founder and editor of Common Stock Warrants and its predecessor, Precious Metals Warrants and a 1967 graduate of St. Mary’s…

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How to Analyze Insider Selling in the Junior Mining Sector

The junior mining sector has been performing much better in the last few months and we have seen many of the shares prices jump up substantially in price. Investors may be asking, 'is it too late to buy or should we sell?'

One piece of information easily available to investors is the insider activity which we always factor into our decision making process. Frequently we see articles on the merits of insider buying but rarely is there much discussion on insider selling so let us give you our spin on this subject.

Perhaps we should remember that corporate insiders, i.e., officers, directors and 10% and more shareholders are also investors. They are just like us, in that they have a multitude of reasons for which they could be selling the company's shares. Think of any personal reason you can imagine, divorce, sending children to college, taxes, health issues, etc. Our observation has been that the insiders tend to sell early leaving some very nice profits on the table. But investors need to remember that we are investing to make money so leaving some profits on the table must be acceptable and inevitable.

What concerns us is when they 'may be' selling because of something negative for the company, currently or coming soon. This is virtually impossible to assess but we look for signs in their insider activity of company shares.

Our basic philosophy is; why should we as investors be buying if the insiders are selling? I hate to think that I just bought the shares that an insider has sold. While in the long run this may not be relevant I would prefer to be investing in another company.

Let's cover two different situations for you.

Establishing a New Position

If you do not currently have a position in common shares of a company we suggest checking out the insiders buys and sells before entering a position. If the insiders are buying this should just re-enforce you decision to buy. But if the insiders are selling, this should at least give you reason to pause.

You're excited and want to enter a new position recommended by your favorite analyst or newsletter but the insiders are selling and you must decide what to do.

Several steps we would recommend to investors:

  • Look at a chart for the last year
  • Have the shares moved up substantially in price
  • Are the insiders selling into the rise in price
  • How many insiders are selling

Each situation is different but if the shares have moved up substantially, say 100% or more and there are two or more insiders selling, I would not purchase these shares. Let's look for other opportunities.

Evaluating a Current Position

Let's assume you were fortunate to purchase some junior mining shares and have seen the share price rise 100% or so but it has come to your attention that some of the insiders are selling. What should you be looking for?

  • How many insiders are selling
  • Did the insiders sell only one time or perhaps you see a pattern of selling
  • Look at a chart for the last year

The good news in this situation is that you have a profit but you need to make sure you do not let it slip away. You only make money when you close out your trade so be smart about it.

In our opinion, if only one officer is selling we would tend to stay with the position but watch it very carefully. If two or more insiders are selling we would be much more concerned and would probably take some profits ourselves.

If you really like the company we suggest you sell half of your position and ride with the balance which is now free as you have captured a 100% profit. If you are neutral or negative on the company now is the time to exit your trade in total, capture your gains and look for new opportunities of which there are many in the natural resource sector.

The buying and selling patterns of corporate insiders can be very telling and should be of interest to and considered by all investors as part of their investment approach.

For those readers unfamiliar with our services:

  • PreciousMetalsWarrants.com provides an online database for all warrants trading on the natural resource companies in the United States and Canada.
  • InsidersInsights.com tracks the buying and selling of corporate insiders with a focus on the junior mining and natural resource sectors. Buy and Sell Alerts are issued as deemed relevant based upon our analysis.

We encourage all readers to sign up for our free weekly email.

 

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