When you're analyzing a company you're thinking of investing in, you no doubt look at many different factors. One you may never have considered is insider buying. Here are five companies currently snapping up scads of their own shares, and why it matters.
What insider buying isn't
Just in case there's any confusion, insider buying is not insider trading. Insider trading involves using information not publically available to profit from a stock purchase. It's illegal and can carry a jail sentence. Just ask Martha Stewart.
Insider buying is the practice of top executives buying shares of their own companies. It's very legal, and something we as investors actually want to see corporate executives doing. And in the recent market turmoil, top executives have been on an insider-buying binge.
Shopping till they drop
After the company reported a lower-than-expected quarterly loss, and strong investment banking results helped lift revenue, CEO James Gorman bought 100,000 shares of Morgan Stanley
Lou Simpson, a director of Chesapeake Energy
Chairman and CEO Fernando Aguirre recently scooped up 133,000 shares of Chiquita Brands International
When executives purchase their own shares, they're staking their personal fortunes to that of their companies', demonstrating corporate confidence as only they can, and hoping you do the same in return.
But back to insider trading
Using insider buys as a corporate-confidence or company-health gauge could be considered the poor man's insider trading. But unlike insider trading, insider buying can be practiced without Wall Street connections and without breaking the law.
It's a given that top executives have unrivalled knowledge of their own companies, so if they're personally investing in the company it's just possible they know something you don't, something positive and actionable. In the end, you really don't need to know precisely what bit of information prompted their purchase. You just need to know they did it and then take appropriate action to benefit from it.
One more thing
Be sure to distinguish between open-market buys and scheduled buys. Many companies engage in scheduled insider buys, but what we're looking for are the open-market variety. Open-market buys signal significantly more bullish intent on the part of the buyer, which is what we're trying to get a read on here. All of the buys mentioned above were open market.
If only Martha had been more Foolish
You don't have to wait for market crises to look for instances of insider buying; it goes on all the time. To research insider buys:
- Go to the SEC's search tool for its EDGAR filing database. Be sure to click the button to include ownership forms.
- When you get into the company filings page, look for documents titled "Statement of changes in beneficial ownership of securities." Here you'll find records of all executive stock purchases and sales.
- You can also get insider buying information from Yahoo! Finance. Simply go to the ticker page of the company you're interested in, scroll down to "Ownership" in the left-hand navigation, and click on "Insider Transactions."
- For more in-depth insider-buying information, you can also subscribe to Form4Oracle.com, a pay website dedicated to the world of insider buying. It offers a two-week, free trial demo.
There's no single factor you should ever completely rely on when it comes to investing. You should always strive for a balanced analysis, vetting a potential investment from many different angles. But when you notice top executives buying shares of their own company, it's something worth paying attention to.
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Though he seems to know an awful lot about it, Fool contributor John Grgurich has never gone to prison for insider trading, nor does he own stock in any of the companies mentioned in this article. The Motley Fool owns shares of Chiquita Brands International. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Corning, and GM. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has an absolutely scintillating disclosure policy.