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A Potentially Bullish Sign from some Very Knowledgeable Investors
By: David Sterman
Company executives may not know much about the stock market. But
they know plenty about their own business. That's why many
investors track their every move. When these insiders notify the
Securities and Exchange Commission that they have just bought
company stock, investors sit up and take notice, because future
results may be brightening. But few investors pay heed to sales of
stock by these insiders. That's because there's usually a lot more
selling than buying, as these insiders often are simply taking
profits from stock option grants.
Well, just last week, we saw more insider purchases than insider sales, according to InsiderInsights.com. The net positive reading hasn't been seen in some time. In fact, the last time insiders posted such a bullish bet on stocks was in April 2009 - just a month after the powerful rally began. Many of the recent buying transactions appear to be coming from companies that have seen their shares sharply pushed off their highs, even as the fundamental outlook for the company is unchanged.
But the folks at InsiderInsights bring a caveat: executives at companies are often a bit naive when anticipating how their stock will fare in the near future. Their insider buying activities tend to pay off, but only over the medium or long-term. In fact, history has shown that an increasing number of insiders can step in to buy their shares as a market falls further and further. So for many investors, it pays to brush up on the companies that seeing heavy insider buying, but hold off jumping in until you think the market has stabilized.
Action to Take --> There are a few other items to monitor. First off, you should be heartened when several executives at a firm do some buying. Look for buying clusters by the chief executive officer, the chief financial officer and any board members. In addition, you may want to look at their track record. Various websites will tell you when insiders bought and sold in the past. And you can go back and see how those trades panned out. You want to mimic the insiders who have a history of buying their own stock closer to lows and selling closer to highs.
Not surprisingly, executives of oil and gas firms that are squarely focused on land-based drilling and oil and gas transport have been active buyers of their stock lately. That's because they've been tarnished with the same brush as their offshore-focused peers. Names in the space include PetroQuest Energy ( PQ ) , which just saw more than $10 million in insider buying and Crosstex Energy (Nasdaq: XTEX) , where insiders recently spent $13 million on their company's stock.
Insiders will occasionally buy their own stock even when it's trading well above the lows, as they see a future that is even brighter than analysts expect. Insiders picked up more than $6 million in stock at American Superconductor (Nasdaq: AMSC) at around $30 a share, even though shares had been closer to $25 a few weeks earlier. In a similar vein, four different insiders bought a collective $8 million in stock at Loral (Nasdaq: LORL) , a satellite services provider, even as shares sit at twice the 52-week low.
-- David Sterman
Disclosure: David Sterman does not own shares of any security mentioned in this article.