The old Lynchian saw has it that insiders sell company shares for many reasons, but only buy for one: They think the stock will go up.
I don't really believe that. I've seen insider stock purchases, both real and purported, used over and over again as PR tools to try and prop up the stocks of shaky companies like Pegasus Wireless and Overstock.com (NASDAQ:OSTK). The real difficulty isn't in finding insiders who buy (though they are kinda rare); it's finding insiders whose buys you can trust.
Me, I put my faith in Sharky. That's what I call American Eagle (NYSE:AEO) Chairman Jay Schottenstein -- and I say it with the utmost admiration.
You see, the final nudge that put me into American Eagle a couple years back wasn't just its stellar cash flow and great returns on capital, but the insider buys made by Senor Schottenstein when the company's shares got killed. He piled more than $20 million into the stock in September of 2005, when the shares had been cut to a split-adjusted $14 to $15 a share. He sold many of them later for a very tidy 100%-ish gain. (I sold some of mine then, too.)
Here's a glimpse at some of the insider activity that made him more of his millions. Again, pay attention to that chart and notice that it's not all buying. In fact, there's an awful lot of selling. To me, that's the clincher (and it's why I call Schottenstein "Sharky"). Other investors might prefer a chairman who bought and never sold, but a guy who buys low and then sells high is much more useful to me as an inside indicator. In fact, his example helped convince me to lighten the load around the 52-week high of $34 a share, back at the beginning of 2007.
I'm positive that Schottenstein already has enough money to live like a rock star, and enough shares of American Eagle to paper an entire suburban mall with certificates. So when he buys, I'm dead certain it's because he sees an easy opportunity to make money at the expense of short-sighted Wall-Street navel-gazers.
Apparently, I'm not the only one who feels this way, as Sharky's latest buy seems to have sent the shares up by 10% over the span of a couple of trading days -- at least, until a breathless analyst downgrade bopped shares today. (Bent to Wall Street: Please keep the downgrades coming!)
All in all, I find Sharky's buying and selling to be a pretty refreshing antidote to Wall Street norms: collecting no-risk options, never buying a stub, and selling like crazy all the time. If you want to see the behavior that's tragically typical, check out the insider action atGoogle (NASDAQ:GOOG),Amazon.com (NASDAQ:AMZN), Crocs (NASDAQ:CROX),Urban Outfitters (NASDAQ:URBN),Hansen Natural (NASDAQ:HANS), or even the sum total of the insiders at American Eagle.
Lots of red there. Kinda reminds me of blood in the water. Maybe now you understand why I'm so happy to find a shark I can trust.
