Mesaba,
People shouldn't be looking for insider buying, they should be looking for insider selling and take that as a warning.
Though I understand the intent of your words, actually you've expressed the exact opposite of conventional wisdom for those investors that commonly track insider activity.
When an insider sells shares (or options), there are many valid reasons to do so that may have nothing at all to do with the company's future fortunes. For example, an executive may be forced to sell to satisfy a judgement in a divorce situation, or maybe needs to raise cash for another investment opportunity. Perhaps he or she is merely diversifying, or maybe they're engaged in personal estate planning and desire to transfer dollars (not equity value) to a child or other relative. Maybe they've got college tuition to pay, or they've just bought a new home. Lots of good reasons to sell, and only one bad explanation (when the executive feels that the stock is overpriced and therefore ripe for a price slide).
However, when an insider is buying, there is only one reason to do so, and that reason is that the executive believes that the value of the investment will increase. Some investors call this the greed factor. Remember, most executives get very handsome options packages, so to go out into the market and buy free trading shares implies that the executive has ample reason to believe that the stock is undervalued at this point.
As important as insider buying is, it is even more important as to who the buyer is, or more accurately worded, their position within the company. CEOs and CFOs are uniquely positioned to know more about the company's finances and prospects than any other insiders. So when you see these guys/ladies buying in the open market, it's almost a no-brainer that outsiders should be looking at the company as well. Directors and vice-presidents who buy in clustered patterns should be respected too, but beware of these buys because the company may have just enacted a requirement that all insiders maintain a designated share level according to their individual role within the firm.
It is also important for the small investor to know that insiders are notoriously early in their BUY decisions, as much as 6 to 12 months early. One acknowledged reason for this is that insiders do not want to have to publicly explain fortuitous BUY decisions that occur just prior to a good news release and subsequent price rise. Conversely, no one wants to be sued for selling into a price decline when a SELL decision is made just prior to a bad news release.
The bottom line is that Candle stick is partly right in his viewpoint. I must agree with him that I would like to see insider buying activity on the open market. But I'd like to see it because the JMAR insiders believe in their destiny, rather than that they were forced into buying to satisfy some corporate edict to temporarily inflate the stock price.
KJC |
