by Tim Melvin | December 6, 2013 10:37 am
One of the catalysts I track very carefully is insider buying and selling. No one is in a better position to evaluate the conditions and prospects of a particular company than the people running the show.
The earliest study I can find on the subject was done by Victor Niederhoffer and James Lorie back in the 1960s. Insider buying has been studied endlessly by Nejat Seyhun, LSV Asset Management and others, all of whom reached the same conclusion: Insider buying has a positive expectation and while it is not a precise timing mechanism, it can be used to find winning stocks.
I am a bit of geek, so I have played around with the insider buying statistics the past few years and found a very powerful pattern in the data. Since 2008 I found that when the top two executives of a company open their checkbook and make an open market purchase of $50,000 there is an enormous positive expectation. A staggering 87% of the time after one of these cash purchases, the stock has gone higher — with an average one-year return of 77%. Since stumbling upon this anomaly, I have tracked the buying of top executives very closely.
I use insider buying in combination with my usual value measurements to find safe and cheap stocks that may be on the verge of a move higher. In the past month, we have seen some interesting buying activity in stocks that trade for less than the asset value of the underlying company.
I have written in the past of my current fondness of silver miners. I have no idea where the price of silver will go in the future, but the miners valued as a business sell for a lot less than their asset value. Apparently the top executives agree, because these stocks have seen significant insider buying. The President and CEO of Hecla Mining (HL) Phillips Baker recently cracked open his wallet and purchased $91,500 worth of his company’s shares. The miner sells at just 70% of book value right now. The buying of Couer Mines (CDE) CEO Mitchell Krebs falls just short of the $50,000 threshold, at $49,985, but several other executives including the CFO have bought shares on the past few weeks. Smart traders should follow them into the stock.
I am a big fan of Swift Energy (SFY) and have been for some time. The company was slow to move production away from natural gas to oil and liquids, but they are moving that way now. They’re also looking to shed non-core properties and operations and own some valuable real estate in the Eagle Ford Shale fields in Texas. The stock is largely ignored by Wall Street and trades at just 56% of book value. CEO Terry Swift likes the long-term prospects of his company as he just wrote a check for $141,080 to buy more shares. This is on top of the $237,000 he spent buying stock back in August.
The CEO and CFO of a company know more about the finances and potential of a company that anyone else. When they make an open market purchase of shares in the company they run, investors should pay close attention and follow insider buying into the stock.
As of this writing, Tim Melvin was long HL, CDE, and SFY.
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