Pick up Small-cap Gains with Insider Buying

When you are researching stocks to add to your portfolio it is sometimes hard to know what to look for… With so much information out there on publicly traded companies, one important evaluation that will often get over looked is insider buying. But missing out on this insider sentiment indicator could be a big mistake. Here’s everything you need to know to take advantage of insider accumulation.

Insider buying can often be a good indicator of what’s to come… but when checking a company’s insider transactions, it is important to know exactly what you’re looking at.  More importantly, you need to know what information can signal a major move in a particular stock.

Tracking insider transactions can be beneficial for investors and traders. You can learn a lot by looking into the trading activity of people that are “in the know.” And, because the SEC requires insiders to report their trades, the information is easily available to the public (you can find it on Yahoo Finance by selecting “Insider Transactions” on the right hand side).

Peter Lynch, most famously known for his work as the head of the Magellan Fund, once said, “An insider might sell their shares for any number of reasons, but they only buy for one: they think the price will rise.”  There are countless reasons a insider will sell part of their stake… but who is going to buy shares if they think that the stock price will soon plummet?

While this may seem like common sense, there are a few things to keep in mind…

The SEC defines an insider as a person who owns a 10% or more stake in a particular company.  There are both legal and illegal insider transactions. Illegal insider trading is when an insider uses or gives information that is not public to trade a security. Legal insider buying and selling is when an individual is trading based on personal reasons or information that is already divulged to the public.

Insider Buying

When following insider buying it is important to note some companies require employees to buy shares.  Other companies offer stock loans essentially allowing employee to buy shares at a discounted price. These purchases do not necessarily show value to investors so it is important dig a bit deeper.

Small purchases of shares may not be worth looking into.  But if you start to see a trend of insiders purchasing shares, this could be a good indication the company will soon be in a more profitable place.

Another figure to look at is when they are buying.  If they are buying at a low it could be a good indication of a rebound. If they are buying at a high it could be a sign that the stock will go even higher.

Insiders are prevented from buying and selling a stock within 6 months. Because of this, insiders normally buy a stock when they think it will perform well in the long term.

Insider Selling

There are two kinds of insider sellers— those who sell for liquidity purposes and those who sell because they believe the stock has run its course.  Insiders will liquidate their shares for many reasons.  Some of these reasons could include: Buying a house, the need for immediate cash, or they may be simply looking to diversify their portfolio.  Because of this, an individual insider selling shares of stock may mean absolutely nothing to an investor.

What you want to look for when looking at insider selling is clusters; groups of insiders, preferably more than 2, liquidating shares. It is also a good idea to know how many shares these insiders own. Selling 1,000 shares to someone who still has 100,000 shares in the company shouldn’t send up a warning signal.  However, selling off 1,000 shares when the insider only owns 2,000 may be something to pay attention to.

It is also important to note when insiders are selling their shares. Most insiders aren’t day traders. Many follow the buy low, sell high philosophy. Selling off shares at a 52 week high may just be a way for the insider to book profits. On the contrary, selling off shares at or near a low could be a bad sign that the company isn’t doing as well.

Research has shown that insider transactions are a valuable measure of broad shifts in the market and sector sentiment. While using insider information should not be used in place of your normal research on a company, it is a good way to compliment it. Even though insider selling may not always be a good indicator of what’s to come, insider buying should alert you that the people in the know have high hopes.

In the small cap universe, there are a number of companies right now that are showing high insider buying. Three of them you may want to keep your eye on are Accelrys, Inc. (NASDAQ:ACCL), Hercules Offshore, Inc. (NASDAQ:HERO), Akron, Inc (NASDAQ:AKRX).

Sincerely,

Jessica Comitto
Associate Editor, Penny Sleuth

Pick up Small-cap Gains with Insider Buying was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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