Insider Buying Trends: Are You Using This Powerful, Reliable Indicator?
by Karim Rahemtulla, Advisory Panelist
Tuesday, August 17, 2010: Issue #1325
If you think there are no investment opportunities out there, think again.
Sure, it's not easy to find them in a market that is all over the place at the moment. But it certainly helps if you know where to start looking.
In times like these, you have to be adept at spotting signals and ready to go long or short at any given moment. That's what happened to me last week...
Shaking Down Company Insiders for Profits
A company that I'd been tracking for a while announced its quarterly earnings.
The numbers were good, but not a home run-type performance. Its future earnings outlook was excellent - although not quite enough to make me salivate.
But here's the rub: The reason I started following the company's progress was because of one of the strongest, most reliable indicators out there.
About two months ago, I noticed that a couple of the company's insiders had made very large purchases. But here's the thing about insider buying: Most people make the mistake of thinking that insider buying means immediate gratification for shareholders.
It doesn't. Insiders cannot buy on non-public information, but they can buy if they think the company has a great chance of landing something huge or if they see business metrics improving.
For investors, the reason why insider buying is such a good signal is that it usually precedes a run-up in the company's share price by about six months.
Earnings Out... Shares Down... But No Insider Panic
Anyway, after the company reported its earnings and revenue, the shares fell by about 10% in the days after the report.
Time to panic? Nope.
At that point, I was looking to see whether the insiders would step up after a so-so earnings release. How would they react? Would they put even more money into their own stock?
As I said earlier, insiders usually buy because they're expecting outsized returns after a period of six months or more. And the big purchases were made two months prior to the release, not because they were using it as a point at which they could sell.
In fact, they couldn't sell then even if they wanted to, since they'd run foul of insider trading regulations, which require the purchaser to hold the shares for six months before being able to trade them.
So what happened?
Insider Buying Now... Better Times Ahead?
Two days after the release, the insiders stepped up to the plate again and bought shares in large quantities.
One insider actually snapped up almost $1 million worth. This came on the back of a $5 million purchase in one transaction in the weeks leading up to the earnings release.
Bear in mind that the company in question only has a market cap of about $800 million, so insider purchases like this are huge. It would be like Steve Jobs stepping up and buying $1.2 billion worth of Apple (Nasdaq: AAPL) shares at one time.
The key point here, though, is this: Whether the shares rally in the short-term is inconsequential. The insiders are expecting better times ahead, not today.
Of course, the market will react to this, too - and no matter how strongly an insider feels about his company, short of an acquisition, all bets are off if the market tanks.
Tracking Insider Buying: Flying High Or By the Seat of Your Pants?
In markets like this one, some opportunities are better than others.
But time and again, empirical evidence has shown that large insider buying from more than a couple of company insiders is one of the market's most reliable indicators.
The choice is yours...
Either track down winning stocks by looking for signals that send those stocks to you... or fly blind with hope and a prayer.