Maybe You Should, Too

There are plenty of reasons for investors to be scared now—or at least cautious—ranging from disappointing economic growth in many parts of the world to the prospect of rising interest rates in the US. But the investors who tend to be most knowledgeable about particular companies have been bullish on the stocks of some of those companies. Those investors—the corporate officers and directors known collectively as “insiders”—have been buying shares in their own companies’ stocks. That could be a positive signal for small investors who wonder whether the market still has attractive opportunities or has become too pricey.

Bottom Line/Personal asked Jonathan Moreland, who analyzes insider-buying and selling patterns in search of appealing stocks, to explain how investors can use these insights to choose investments, and which stocks look most appealing…

Insiders Know Best

Insiders typically have the best understanding of a company’s inner workings and long-term prospects. When they use their own money to buy company stock, it can be a valuable signal that the stock is undervalued and poised to rise.

Most investors don’t track trades made by insiders because they assume that such trades are illegal. But insiders legally buy and sell stock in their own companies all the time. According to the Securities and Exchange Commission, a company’s insiders are permitted to buy and sell its stock as long as the action is not based on specific information unavailable to the general public.

Of course, there are various times when insiders can’t do this. For instance, a CEO can’t sell all his shares just before the company releases a poor quarterly earnings report. Also, insiders are prevented from buying and then selling shares within a six-month ­period, and that means they tend to buy when they believe the company will perform well for longer periods of time. You can view recent insider trades and insider-trade track records for any company at my website, InsiderInsights.com (click on the Free Insider Data tab, and enter the ticker symbol in the search box). How to analyze insider purchases…

Make sure the purchases are “significant.” I’m most confident about a stock when I see that the most knowledgeable insiders at a company—the chief executive officer, chief financial officer and high-ranking board members—make purchases equal to 5% or more of what they already own. I also look for three or more insiders buying their company stock at the same time, which indicates a shared belief that the stock is undervalued…insiders with a successful track record in past purchases making new purchases…insiders using their own cash to buy stock rather than just exercising stock options that their companies have awarded them.

Check whether the stock is undervalued. I never buy a stock based solely on insider data. There also must be attractive fundamental valuation measures, such as a low price-to-earnings ratio and steady or increasing earnings growth. I also look for a specific catalyst that can improve a company’s earnings, such as an exciting new product, an acquisition, new management or a positive change in its industry.

Think small. Smaller companies often have just a handful of insiders, which makes their purchases easier to track. These companies also attract ­little coverage from Wall Street analysts, which leaves more room for you to discover hidden opportunities.

My Favorite Insider Stocks

The following five stocks have had significant insider buying recently and have been selling at bargain prices relative to their potential for appreciation…

Agree Realty (ADC). The stock price of this tiny real estate investment trust (REIT) has been dropping because of Wall Street’s fears that rising interest rates will increase the cost for REITs to borrow money. While that’s true, Agree’s ability to raise its rental rates as the economy improves and its stock’s ­recent 5.9% dividend yield should attract investors. The company focuses on retail properties such as shopping centers whose tenants are resistant to Internet competition­—for instance, mattress stores and fitness clubs. Insider activity: Chairman Richard Agree has increased his holdings by 7% and longtime ­director William Rubenfaer has increased his by 43% in the past eight months. Recent share price: $30.35.

Amgen (AMGN). With sales of $19 billion annually, Amgen is one of the biggest biotech companies in the US. Its stock performance this year has lagged the industry because investors are concerned that its blockbuster drugs, such as ­Neupogen (for cancer) and ­Enbrel (rheumatoid arthritis), are facing heavy generic competition. Amgen insiders are betting that the launch of a new type of ­cholesterol-lowering drug this year, Repatha, will excite investors. Insider ­activity: Although I typically prefer smaller companies, the insider stock buying here is convincing. Amgen’s chairman, Robert Bradway, and several directors have substantially increased the overall amount of shares they own in recent months. Recent share price: $168.58.

Avid Technology (AVID). This is a technology pick for more aggressive investors. Avid provides software for filmmakers, studios and musicians to digitally edit video and audio content. Its products have helped create TV shows, songs and movies that have won Emmys, Grammys and Oscars. But the company stumbled in recent years, and in February 2014, its stock was delisted from the Nasdaq because the company failed to file timely financial statements. Now insiders think that Avid, which was relisted in December 2014, is ripe for a turnaround. Its new product line is marketed toward the much larger, ­lower-end, nonprofessional market. Insider activity: Most compelling is longtime Avid director and Viacom executive Robert Bakish’s $2.3 million buy in May. He increased his Avid holdings by 25% in his first purchase of the stock in five years. Recent share price: $9.08.

Cross Country Healthcare (CCRN). This leader in health-care recruiting and staffing has approximately 4,000 contracts with hospitals to provide temporary and permanent nurses and physicians. The stock has returned five percentage points less than the Standard & Poor’s 500 stock index over the past five years, but new management is planning to make acquisitions to increase market share in this fragmented industry. Insider activity: CEO William Grubbs bought $500,000 worth of stock over the past year. Recent share price: $13.81.

Sotheby’s (BID). The stock price of this global auctioneer of art, jewelry and other items has been sluggish the past few years. Even though art prices have soared, which benefits Sotheby’s, the company has faced fierce competition and tighter profit margins, and Sotheby’s has been heavily resistant to change. But a new CEO is aggressively pursuing opportunities, including auctions for collectors who aren’t multimillionaires but still want investment-grade art…and licensing the renowned brand name for wider use in real estate. Insider activity: Longtime director John M. Angelo has an impressive record of profiting from this midcap stock. He recently increased his holdings by 35%, buying more than 50,000 shares for more than $2 million. Recent share price: $38.06.

When a CEO Sells, Should You?

If insiders know the best time to buy their company stock, they also should have good instincts for when to sell. But I’ve found that selling is not a reliable predictor of where a stock’s price is heading or whether you should avoid it or sell if you already own it. Insiders sell their shares for many ­legitimate reasons that have nothing to do with the stock being overvalued or about to drop in price. For example, they may need the cash for personal expenses or the sales might be part of planned programs to diversify their portfolios.

Exception: When a stock price is falling and multiple insiders start selling large amounts of their holdings, that often does send a strong signal that a stock has a grim future. If insiders don’t believe the sell-off will be short-lived and the stock price will soon rebound, neither should you. Examples: Stock in the cloud storage company Box, which lets you store your digital photos, documents and videos securely online, plunged by about 20% from May through early August of this year, accompanied by heavy selling from executives and investors who owned more than 10% of the total shares in the company. Scripps Networks Interactive, which owns the cable networks HGTV and Food Network, has fallen by more than 20% this year through early August, and members of the Scripps family have sold more than $50 million worth of their shares.