John Spears and Jay Hill, managing directors at Tweedy, Browne, and portfolio managers for their Insider + Value ETF (COPY) and International Insider + Value ETF (ICPY), discussed their investment strategy on Bloomberg Intelligence's "Inside Active" podcast. They highlighted the benefits of combining insider buying signals with traditional value investing principles, especially during periods when value investing has lagged and large-cap growth stocks have dominated. Their approach focuses on identifying companies where top executives are buying their own stock, particularly when those stocks are also undervalued based on metrics like price-to-book, P/E, and dividend yield.
Spears and Hill explained that Tweedy, Browne's interest in insider buying dates back decades, with early efforts involving manual review of SEC filings. They emphasized that corporate insiders, particularly C-suite executives like CEOs and CFOs, possess the deepest understanding of their company's true value and future prospects. When these individuals invest their own money, it signals a strong belief in the company's undervaluation and potential for appreciation. Academic studies and Tweedy, Browne's own research, spanning over 20 years, consistently show that insider buying in cheaply valued stocks outperforms benchmarks by approximately 10 percentage points.
To implement this strategy, Tweedy, Browne developed a systematic approach that screens for C-suite insider transactions combined with low valuations. They also incorporate additional safeguards, such as preferring companies with low leverage (net debt to EBITDA below 2.5x) and a strong owner earnings yield (typically 8% or more), to ensure conservative investment in fundamentally sound businesses. This two-part valuation test, which also considers M&A comparable valuations, helps prevent investing in companies solely based on inflated purchase multiples.
The firm's research, which began as an internal study from 1996 to 2022, demonstrated significant outperformance when combining insider buys with low valuations. This led to the launch of their first ETFs, COPY and ICPY. Spears even seeded an experimental portfolio with $6 million to test the strategy before the formal launch of the COPY ETF on December 27, 2024. The strategy specifically focuses on "freewill" insider buying from high-level executives, as studies indicate their purchases have a stronger correlation with future outperformance compared to other insiders.
