A Money article suggests that insider buying can point you to some good deals, noting that in a rising market such as this insiders buy stock when it’s undervalued. And this could serve to push the price up.
David Miller, a manager with the Catalyst Funds, which runs several portfolios focusing on insider buying, tells Money columnist Paul R. La Monica that examples include: “the oil exploration giant Apache (APA), where five board members bought several thousand shares in the first quarter. Another is Icahn Enterprises (IEP), the diversified investment firm of financier Carl Icahn, where the insider buyers include Icahn himself. Both are trading at price/earnings ratios of around 8, based on projected 2013 profits.”
Money calls the above instances “big and cheap” stock shopping opportunities. But Miller suggests investors also look at small, less-visible companies with small P/Es where highly placed insiders are adding to their holdings.
The article also points to a study by Kissan Joseph and Jide Wintoki, professors at the University of Kansas School of Business, who looked at insider action between 1986 and 2011 and found that companies with “significant buying activity and big advertising budgets outperformed shares of companies with insider purchases but relatively little marketing.”
Why? “Joseph suspects that insiders at businesses that are prominent advertisers may have more relevant information about consumer spending trends — information that can help move their stocks,” the Money article says.
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