What's the best way to profit from investing in stocks?
Some people will tell you to buy cheap stocks. Others insist that such stocks are cheap for a reason -- and that growth is the way to go.
And then there's the smart money.
In his classic manual on investing in insider trading, The Vital Few vs. the Trivial Many, famed hedge fund advisor George Muzea explains how he started out as a broker at E.F. Hutton. He tried a little value investing. He gave growth a shot. Muzea ultimately concluded there's just one surefire way to beat the market. Thanks to this discovery, he's now one of the most sought-after hedge fund advisors on the planet, complete with a speed-dial entry on George Soros' iPhone.
So what's the secret to his success?
"When I see a stock on the new low list or one that is being panned in the media, I always look to see what insiders are doing." It's a simple strategy, and the reason for it is just as obvious: "Who knew better what was going on in companies than the officers and directors?"
If you're not inside, you're ... the rest of us
Whether it's the chairman of the board, the CEO, or Mabel over in Accounts Payable, the corporate flowchart is jam-packed with people who know more about their companies than do you or I. And while insiders sell stock for many reasons, there's really just one reason that employees cash their hard-earned paychecks, then turn around and buy company stock: They think it's going up.
So what are these "vital few" buying this week? Lately, most big ticket-buying has been done by "insiders" of a technical stripe -- those deemed "inside" by virtue of their sizeable ownership stakes, such as:
- Adage Capital Partners, which upped its stake in Select Comfort (Nasdaq: SCSS ) by 100,000 shares Tuesday.
- Or Blum Capital Partners, which has been anteing up for additional shares in Career Education (Nasdaq: CECO ) all week long.
- Or Contran Corp, which laid out $3.6 million to take a position in Titanium Metals (NYSE: TIE ) late last week -- perhaps in hopes of turning a quick profit on positive news of Boeing's (NYSE: BA ) upcoming Dreamliner test flight.
Lately, not many big-time purchases in big-name stocks have come up on my radar screen. But luckily, this just makes it easier for us to notice the series of insider buys happening at Western Gas Partners (NYSE: WES ) . Here we find three flesh-and-blood individuals -- President Donald Sinclair, CFO Benjamin Fink, and board member James Crane -- investing a combined $2.4 million on their company's progress. (Notably, these purchases echo significant buying activity by parent company Anadarko Petroleum (NYSE: APC ) over the last couple of years.)
Now, as Mr. Muzea confides: "Normal insider behavior would be to buy into price weakness and to sell into price strength." In contrast: "What you want to look for are new purchases where insiders are buying as the stock goes up, as this implies more good news is coming."
This is why I find Crane's purchases most telling. He was an avid purchaser of Western Gas shares during the second half of last year, as energy prices were pushing the stock price lower. But most importantly, it doesn't appear to scare him that the shares are up nearly 50% already this year. He seems to think they'll go higher, even with the stock within 10% of its 52-week high.
Is he right? Are they all right?
You're asking the wrong Fool, Fool -- my crystal ball's in the shop and out of warranty. But while I can't tell you where Western Gas is heading, I can tell you that the insider buys here look remarkably similar to the buying we saw going on at Enterprise GP Holdings and Enterprise Products Partners (NYSE: EPD ) recently.
It seems that a lot of people who know the gas industry best are coming to the entirely logical conclusion that low prices for natural gas are going to spur demand for the product. Since these companies collect money based on the amount of gas they send through their pipes, that's good news for Enterprise ... and Western Gas. So if you're looking for an explanation of why the insiders are buying here so actively, I think you've just found it.
Oh, and I think you may also have just found a reason to do some buying of your own.
Looking for promising stocks? Anand Chokkavelu asks whether 2009's hottest stocks will keep paying off for investors in 2010.
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