Insider-Owned Stocks Ready to Drop

The rationale for owning a company that is owned in large part by insiders is clear -- your interests are closely aligned with the people charged with running the company's day-to-day operations.

If all goes well, this means that management gets wealthy alongside you as the stock's share price appreciates. This is a criteria Warren Buffett looks for, and it has rewarded the early shareholders of companies like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT).

But insider ownership alone is not enough to merit a buy. In fact, even companies with high insider ownership can sometimes make good short ideas or, conversely, deep value plays.

With this in mind, I scrolled over to our CAPS screener looking for:

• Stocks with a market cap of more than $1 billion.
• Stocks with more than 25% insider ownership.
• Stocks that have fallen from a three-star rating to a two-star rating (out of five) by our CAPS community since the beginning of the year.

Before I move on to the results of what I found, remember that since we started CAPS in 2006, stocks in our CAPS community ranked as three-stars matched the broad market return on an annualized basis, but two-star stocks as a group significantly underperformed the market by five percentage points, annualized! This means that a drop in a stock's CAPS rating is something to keep in mind both before and after investing in a company. It might also be a good indication to consider selling and cutting your losses.

Without further ado, the stocks I found from the above screen included:

Data from CAPS as of 8/5/2008.

Agree? Disagree? Come share your thoughts with the rest of our CAPS community and check out a whole slew of long and short ideas.