An Industry, Insider Buying Party, and a Pair of ETFs that could Benefit

Part of my regular weekly routine is to put insider buying from the previous week into an excel spreadsheet. From there, I organize the information by ticker, looking for companies with multiple executives and insiders buying in clumps. One person buying doesn’t carry the same weight as multiple people within an organization seeing value simultaneously.

Executives carry more weight than directors, in my opinion. The Chief Executive Officer (CEO), Chief Financial Officer (CFO), Senior VPs (SVP)… are more involved in the day to day operations and decision making. As a result, they have a better sense of what’s happening on the ground.

Dollar amount also has a big sway. People can say all sorts of things, but it means a bunch more when they put their money where their mouth is. I see the dollar amount as a measure of conviction. The more money, the more convicted the insider is to their reason for buying.

Cluster buying, executives buying, and dollar amount are typically the things I scan for. I highlight the buys of interest and then examine history for the companies in focus, trying to find insiders with a profitable track record or are acting out of character, i.e. buying when they typically sell, sell, and sell some more.

This whittling process is designed to find standouts.  Well, this week, something else stood out during the routine. Insiders at small, regional, and community banks are buying their stocks like they’re hand sanitizers at Target, Walmart, or the local pharmacy.

Community/regional bank buys accounted for nearly half of all of last week’s insider purchases, according to our records. Now, that doesn’t include financial services companies, real estate trusts, insurance, mortgage companies… the numbers would have been well over 50% if we broadened the scope to financial companies.

Stand alone, 178 insiders from 86 regional/community bank companies from border to borders, sea to shining sea purchased $9.94 million worth of their shares. The average buy was $55,000. You must remember, these are smaller banks, so these aren’t the heavy hitter S&P 500 types. They are upper-middle class for sure, but not Jamie Dimon types.

Trying to decide which of the many community or regional banks to highlight is a difficult task. So many are thinly traded and subject to volatile price swings with any increase in volume. Rather than trying to pick the best of the 86, investors might consider taking a more diversified approach.

Exchange Traded Funds (ETFs) are a more conservative way to go. We’ve got a pair in mind.

iShares U.S. Regional Banks ETF (IAT) focuses on small to mid-sized, domestic regional bank stocks. Year to date, the fund is down 38.23% with a 52-week low of $24.62 and a 52-week high of $51.82. It trades at $29.79 as of the close of business on May 12, 2020 and offers a 3.93% dividend yield.

First Trust NASDAQ ABA Community Bank Index Fund (QABA) seeks to mimic the performance of the NASDAQ OMX ABA Community Bank Index, which excludes the 50 largest banks or thrifts and any bank classified as “international specialization” or a “credit-card specialization” companies. They must have a market cap of at least $200 million, a three-month average daily dollar trading volume of at least $500,000, and “meet certain operating history, solvency, and financial statement requirements.”

QABA is down 36% for the year with a 52-week range of $27.44 to $52.66. It finished trading at $31.30 and has a dividend yield of 3.03%.

Investors must remember that insiders are thinking at least six-months ahead as regulations prohibit short-term trading. Clearly, community and regional banks remain out of favor as they have not recovered to the same degree as many other industries. As such, investors looking to follow the herd of insider buying at small banks across the USA should have a time horizon of at least six-months to a year.