Are You at Risk of Being Left on the Outside Looking In?

Does insider selling suggest we're heading toward a bear market? Photo credit: Flickr/www.LendingMemo.com

As the market bounces around new highs, it has some investors beginning to turn bearish on stocks. One group that's particularly bearish are corporate insiders like company executives or directors. As a whole this group hasn't been this bearish in a quarter century. With insiders so bearish, does that mean it's time to sell?

Insiders don't make great investors
As a whole, insiders are pretty poor investors. A study by Nejat Seyhun, a finance professor at the University of Michigan, found that the average stock sold by insiders actually outperformed the market by 0.7% over the following year. Further, the reason why an insider sells could range from portfolio management to freeing up cash for a spending spree. That's why it's tough to read very much into insider selling.

It's also tough to read into insider buying as well. Company executives incinerate billions of dollars of investor capital each year with poorly timed stock buybacks. Further, some of the worst stock buying in history goes to those insiders that made overly aggressive bullish bets. These insiders used the devastating mistake of loading up on their stock by using margin in their personal accounts or debt to fuel a large corporate buyback spree, only to lose it all when they are wrong on their bullish bet.

All that being said, despite the fact that insiders aren't the best investors, this group does have the most information. That does make their buying and selling something to at least monitor. Lately insiders are selling everything from tech stocks to consumer goods. But there are a few sectors that insiders are still bullish on even as most of their peers are dumping stocks. These insiders see a compelling long-term story that's worth buying even in the face of new market highs.

The bulls among the bears
Energy is one sector that insiders are particularly bullish on these days. Insiders at Continental Resources (NYSE: CLR  ) , for example, are among those buying as the company's Bakken Shale focused drilling program makes it one great energy growth stock.

There are still reasons to be bullish. Photo credit: Flickr/www.LendingMemo.com

Insiders and investors alike are drawn to the company's top position in the oil-rich Bakken Shale. Its top position in that play fueled a 39% jump in production last year. But in addition to the Bakken, Continental Resources is now pushing forward on another promising oil-rich play in Oklahoma. Continental Resources has amassed a dominant lease position in what it's calling the SCOOP, or South Central Oklahoma Oil Province. These two positions have given the company a clear vision for growth as its plan is to triple its production from 2012 levels by 2017.

Another example of a company where insiders are bullish is General Electric (NYSE: GE  ) . The industrial giant runs eight different businesses, which have always made the company a good proxy for the American economy. That said, the company is benefiting from a number of major trends that have it poised for more growth in the years ahead. Among those trends is the major transition taking place in the energy industry. As the following slide shows, General Electric is well positioned to benefit from oil and gas growth in the future.

Source: General Electric Investor Presentation (link opens a PDF)

In addition to that General Electric is also well positioned as the world slowly transitions to cleaner energy. The industrial giant makes wind turbines, solar panels, and a whole host of other products focused on cleaner energy. Because of this focus the company's Ecomagination platform generated $160 billion in revenue since 2005. That's on the back of $12 billion dollars in investments so far. This success has the company is adding another $10 billion to its investment in cleaner technology to bring its total investment up to $25 billion by 2020.

This dual approach to energy means that no matter what path we take to fuel our economy in the future, General Electric is putting itself in the position to profit from our energy future. It's no wonder why insiders are bullish on the company's long-term prospects.

Investor takeaway
Insiders might not be the best investors to follow given their poor track record. So, while there is a case to be made that we could be in for a stock-market pullback, even insiders don't know when their stock is going to take a dive. That's why investors should pay more attention to the long-term story to buy and hold companies that have a compelling long-term growth plan like Continental Resources and General Electric. Those long-term investments will make any short-term dip a distant memory as the thesis plays out in the years to come.

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