When a company's managers or directors buy blocks of shares, it often means the company's fortunes are looking up. But insider buying is far from a perfect indicator. To profit from this information, you still need to be able 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. Jonathan Moreland, who publishes the InsiderInsights newsletter, recommends using insider activity as a first screen to identify stocks for further research.
For the following stocks, recent insider buying may be a harbinger of good things to come.
• Boston Scientific (symbol BSX). 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. 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, recently traded at $13. Still, Muzea cautions, the shares could take a while to recover.• Dow Chemical (DOW). 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 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. 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 percent 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 11 times expected 2008 earnings and yield a generous 4.2 percent.
David Landis is a contributing editor to Kiplinger's Personal Finance magazine. Send your questions and comments to [email protected]