Insider buying is often a good signal to buy
When shares of funeral-services company Carriage Services slid amid disappointing profits last year, Chief Executive Melvyn Payne sensed...
When shares of funeral-services company Carriage Services slid amid disappointing profits last year, Chief Executive Melvyn Payne sensed a bargain.
He says Wall Street dismissed his prediction that 2007 would be strong. "I had to say to myself, 'Put your money where your mouth is.' "
In November and December, Payne spent $400,000 buying shares. The investments were impeccably timed. Shares rose about 25 percent in February after a strong earnings forecast.
"The insider buying was a huge signal in retrospect," says James Clement, an analyst with Sidoti & Co.
Many investors view share purchases by top executives as indications to buy. (Selling is not as predictive; it may be based on an insider's need for cash.)
Insiders "know more about the company than any analyst could hope to glean" from financial statements, says David Coleman, editor of Vickers Weekly Insider.
Stocks of companies that saw insider buying outperformed the Standard & Poor's 500 index by 13.7 percentage points between 2003 and 2006, according to a Morgan Stanley study.
Insider transactions should pick up now that most quarterly earnings are out and trading restrictions are lifted, says Ben Silverman, InsiderScore's director of research.
Transactions can be viewed for free on the Web site of the Securities and Exchange Commission, www.sec.gov, or via paid services.
For investors, big trades by the most senior executives are key. Timing also matters.
A Citigroup study of insider buying by British executives found that purchases just after the release of results were more closely tied to stock gains than purchases at other times.
Of course, insider buying should be one of many factors in a stock decision. Some insiders have lousy timing.
Executives at media companies lost an average 19 percent on their purchases, the Morgan Stanley study shows.