When a stock continues to underperform the market for an extended period of time, some investors may write it off as a lost cause. But before you relegate a company to your portfolio junk bin, you may want to see who's still buying it. A stock may look like it's down for the count -- but if it's seeing a spike in insider buying, it might very well be poised for a rally. 

Think about it -- insiders have an intimate knowledge of their companies, and unlike us, know what's going on inside the boardroom. So if they're buying at current levels, they may consider their stock to be undervalued.

Any time management starts snapping up stock, consider the possibility that the market may be overly pessimistic about the company's prospects. And when insiders buy in spite of overall bearishness about the stock, contrarian investors will surely take notice.

Contrarians prey on the weakness of a crowd -- namely, its tendency to get carried away by hype, be it positive or negative. Knowing that this type of emotional investing skews the market's valuation of a stock, contrarians look for more reliable indicators of a company's actual financial health -- and insider buying of beaten-down stocks is one of those contrarian green lights.

In short, don't be so quick to dismiss underperforming stocks -- there may very well be a mint to be made. Here's a list of the ones seeing insider buying, sorted by annual performance:

Company

Insider(s)

Trade

Annual Stock Performance

Neutral Tandem (Nasdaq: TNDM)

Rian J. Wren (President & CEO), Robert Junkroski (Chief Financial Officer & EVP), and David Lopez (Senior Vice President of Sales)

The three of them bought $115,380 on Sept. 14

-58.82%

SWS Group (NYSE: SWS)

Michael A. Moses (Director)

Bought $22,230 on Sept. 10

-46.50%

Spartech (NYSE: SHE)

Jackson Robinson (Director) and Walter Klein (Director)

The two of them bought $118,600 on Sept. 13

-40.17%

Bank Mutual (Nasdaq: BKMU)

Michael W Dosland (Senior Vice President-CFO) and Michael T Crowley (Chairman and CEO)

The two of them bought $57,837 between Sept. 10-14

-37.67%

MELA Sciences (Nasdaq: MELA)

Martin D Cleary (Director)

Bought $26,600 on Sept. 10

-36.89%

Metro Bancorp (Nasdaq: METR)

Gary Nalbandian (President/CEO)

Bought $23,715 on Sept. 10

-33.14%

Interactive Chart: Press the Play button to see how analyst ratings for all the stocks mentioned above have changed over the past two years …


Kapitall's Eben Esterhuizen, CFA, and Alicia Sellitti do not own shares of any companies mentioned.

The Fool owns shares of MELA Sciences and Neutral Tandem. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.