Five Stocks Insiders Love


Five Stocks Insiders Love

If corporate managers and directors are buying their company's stock, maybe you should, too.

Five directors of Freeport McMoRan Copper & Gold went on a buying spree early in 2007, snapping up $61 million worth of the mining company's shares at prices ranging from $52 to $64. For anyone who was watching, the signal couldn't have been clearer. Late in the year, the shares topped out at $120.

No wonder savvy investors keep close tabs on the buying habits of corporate insiders. Officers, directors and large shareholders know more about their companies than anyone else. When they are willing to put their own cash on the line, it can mean good things are in store. By the same token, insider selling can be an ominous sign, but it's a tougher signal to interpret. Executives often sell for reasons unrelated to a company's prospects, such as a desire to diversify their personal holdings.

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Insiders are required to publicly disclose purchases and sales of their companies' shares within two business days, making it easy to track their moves. and Yahoo Finance are among sites that offer this information free.

But although insider buying is often a positive indicator, it is far from a perfect one. Profiting from this information still requires an ability to sort significant moves from false signals. Some things to keep in mind:


1. Top execs know the most. Directors aren't always in the loop, although some can be well informed, particularly if they are big shareholders or have significant experience in the industry.

2. There's wisdom in crowds. It's a good sign when more than one insider is buying the company's stock.

3. Size matters. Look for purchases that are large relative to an insider's holdings or previous purchases.

4. Timing counts, too. Buying after the price has fallen could indicate that the shares are bottoming. Continued buying as the price pushes upward is very bullish.


Even with timely disclosure, stock prices may not reflect insider moves for months. "Insiders see value way earlier than most other investors," says George Muzea, head of Muzea Insider Consulting Services, based in Reno, Nev.

Insider buying should be one ingredient in a stock-picking strategy. Jonathan Moreland, who publishes the InsiderInsights newsletter, recommends using insider activity as a first screen to identify stocks for further research. "I buy a stock because I like its fundamental value and business prospects, but I might never have known about it without the insider buying," says Moreland.

For the following stocks, recent insider buying may be a harbinger of good things to come.

Ailing medical-device maker. Product recalls, patent fights and an expensive acquisition are just a few of the problems behind a four-year slide in the shares of medical-device maker Boston Scientific (symbol BSX). But a recent $68,000 purchase by director Joel Fleishman could signal a turnaround.


Muzea calls Fleishman, a Duke University law professor and a director of Polo Ralph Lauren, a "smart buyer." Muzea also notes that there has been no insider selling since November. The share price, which peaked at $47 in 2004, traded at $12 in mid March. Two analysts recently boosted their ratings on Boston Scientific to "buy." Still, Muzea cautions, the shares could take a while to recover. "This is an idea for a long-term buyer," he says.

Bet on lower oil prices? Purchasing by a lone insider, particularly if he or she is a director, isn't always persuasive on its own. But John Hess's $1-million investment in Dow Chemical (DOW) in February caught the eye of Ben Silverman, director of research at InsiderScore, which advises institutional investors.

Hess, a Dow director, is chief executive of Hess Corp., a large oil company. Oil is a major raw material for Dow. Silverman says Hess's buy may reflect an expectation that oil prices will moderate this year. If so, that would be welcome news for Dow, which saw its raw-material costs soar 31% in last year's fourth quarter from the year-earlier period. Shares of the Midland, Mich., company have been drifting downward for more than two years. They now trade at ten times expected 2008 earnings and yield a generous 4.6%.

A company with L'eggs. Moreland says the purchase of more than $1.3 million in stock by three directors and the chief marketing officer drew his attention to Hanesbrands. The maker of undergarments and casual clothes owns a number of well-known brands, including Hanes, L'eggs, Playtex and Champion.


However, after the company was spun off in 2006 by Sara Lee, it was buried under more than $2 billion in debt. The stock (HBI) tumbled from about $30 in mid December to less than $22 in mid January, apparently over concerns that high interest payments would drag down profits. But the firm generated enough cash last year to pay down $178 million in long-term debt and repurchase $44 million worth of stock. Insiders continued to buy as the price pulled back, and the stock has rebounded to $27. It now trades at 12 times estimated 2008 earnings, and analysts expect profits to rise 35% this year and 18% in 2009.

Big energy play. Several directors and the co-chairman of McMoRan Exploration have been accumulating their company's shares since last summer. The purchases by director Robert Day particularly pique Muzea's interest. Day, the chairman of money-management firm TCW Group, cleaned up on a timely, $57-million investment in Freeport McMoRan Copper & Gold, for which he is also a director. Since January, he has invested $23 million in McMoRan Exploration at increasingly higher prices, ranging from $13 to $16.

The stock (MMR) of the oil-and-natural-gas producer has risen from $10 to nearly $18, thanks to some successful new offshore wells in the Gulf of Mexico and a recent acquisition that more than quadrupled McMoRan's proven reserves. Day has been buying all the way up. "That's a pattern I love to see," says Muzea. "He is telling us by his actions that he believes better-than-expected news is continuing."

A boost for gizmos. Shares of Synaptics, a maker of touch pads and other devices for computers and electronic gadgets, went into freefall in January after the fast-growing company warned that first-quarter earnings would be lower than expected. But insiders have been flashing some encouraging signals.

Two directors, Keith Geeslin and James Whims, bought $642,000 worth of shares at $24, close to where they bottomed. The stock (SYNA) remains way below its November 2007 peak of $61. But Moreland also notes two more-subtle moves: Another director, Federico Faggin, has called a halt to an automatic-selling plan through which he was unloading shares during most of 2007. Securities law requires insiders who sell shares to wait six months before buying (the reverse also holds true for insiders who have been buying), so an absence of selling in this case may be a bullish sign. In addition, chief executive officer Francis Lee has been exercising stock options and holding on to the shares rather than selling them. That's another optimistic sign for the Santa Clara, Cal., firm, which has promised that results will improve later this year.