Every stock investor looks for some sign that he’s picking the right stock for big profits. I know I do. I want to know, with as much certainty as possible, that I’m making the right investment decision. Of course, there’s no signal that’s guaranteed to work 100% of the time. But there is one that’s a pretty good indicator that a company’s shares are about to head higher.
This information came from Alexander Green, author of the Insider Alert market advisory newsletter, and was passed on to me by Dr. Steve Sjuggerud, president of Investment U and a market expert whose recommendations I pay close attention to. “When you find a stock that looks good fundamentally (it’s ‘cheap’), that looks good technically (it’s starting to move up), and that is being bought up heavily by insiders, chances are very good you’ve got a big winner on your hands,” Alex said.
In other words, when insiders buy, it may be time for you to buy. Insiders, after all, are the people who know what is going on — really going on — with a company. They’re the men and women who run a company, the directors who oversee those corporate officers, and other share owners who are supposed to know more than “outsiders.” As Alex said, these individuals “know virtually everything that can be known about the companies they run. They know the pace of day-to-day sales. They know about new products that are being developed. They know whether their company is a takeover candidate . . . or is already receiving unsolicited offers.
In short, they know everything that can reasonably be known about the company’s business prospects, employees, customers, suppliers, and competitors.” So when they go to the marketplace to trade the shares of their own companies, they’re making very well-informed decisions. You might even think of it as trading with an unfair advantage. That’s why the U.S. government requires all insiders to report their transactions to the SEC no later than the 10th day of the month following the month in which they bought or sold their company shares. And that’s where you can find the information that could earn you some big profits.
As Alex Green sees it, there are all kinds of reasons an insider might sell his company’s stock that have nothing to do with its business prospects. He may, for example, need money to pay for a big purchase. Or he may simply want to diversify his holdings. “But,” Alex said, “there is only one reason that multiple insiders back up the truck to BUY their own company’s shares.
Based on their ‘unfair advantage,’ they think their shares are set to soar.” And more often than not, these inside buyers are right on. Alex pointed to a study conducted by researchers at the University of California at Los Angeles and at New York University. These researchers found that a group of insider buyers, most of them from tech and pharmaceutical companies, beat broad market indexes by an average of 9.6% in the six months following their purchases.
Bear in mind, that’s not a total return of 9.6% but returns that were 9.6% better than the market’s return. “There are two important points here,” said Alex. “First, 9.6% is just about the market’s average annual return over the past 100 years. Yet insiders are earning 9.6% MORE than the market’s return in just the first six months after their purchases. And, secondly, remember that this is merely the AVERAGE gain after an insider purchase. What if you restricted your purchases to just those companies that were fundamentally sound, had a major catalyst for positive change, AND heavy insider buying too?”
If you were to follow that course of action, according to Alex, you could expect very good things to happen. Look at what happened to Tyson Foods a couple of years ago. At that time, Tyson was trading in single digits and several of the company’s directors started snapping up shares. One bought 10,000, another bought 15,000, another 25,000.
Not long after that, Tyson’s profits headed higher and the share price followed suit. Within six months, the company’s shares gained 80%. The important thing, though, is that investors who tracked insider trading saw that Tyson’s directors were buying before the price headed for the sky. If you had seen what Tyson’s insiders were up to, and understood what it meant, you could have earned the same big profits.
Here are a couple of other examples: A few years ago, a money manager who sits on the board of telecom carrier Broadwing Inc. was a strong buyer of the company’s stock on 10 separate occasions. Within six months of each purchase, the company’s shares rose — 23% on the average. In one instance, the company’s stock rose 80% following his purchase of 24,000 shares. In the spring and summer of 2000, insiders at B.F. Goodrich were snapping up shares at around the $23 level.
Over the next few months, the stock went straight up . . . all the way to $43. Does looking at insider buying always work? No. But, as Alex says, when you are able to find a stock that looks cheap relative to value, that is already technically bullish, AND that is being heavily bought by insiders, chances are good you’ve found one that’s likely to be a winner.