One way to pinpoint companies with bullish sentiment is by looking at company insider buying trends. After all, company insiders such as upper management and members of the company's board know more about their companies than any other investors.
It's what makes watching insider buying so interesting. Whenever shares are sold, analysts and investors question the motivation. Did the insider sell because they need more liquidity to buy a new car, pay medical bills or go on vacation? Or does the insider simply think the shares are overvalued and likely to drop in value? Do they think an industry competitor is going to give them a run for their money? There are several possibilities.
But when insiders start to buy up shares of their company, there's really only one good explanation: They think the share price is undervalued. If they're buying, then insiders are confident there is more upside potential, and might have a hunch their stock is going to rally. Of course, these predictions aren't always realized, but it's a strong indicator for outsiders to go by.
Insider activity alone isn't enough to actually shift market prices. This day and age it's the work of hedge funds that make it their daily business to buy, sell and move millions of shares every day that really get share prices moving. But hedge funds pay attention to insiders, too, so insider activity can spark institutional buying (or selling).
So we were wondering, which companies have seen the greatest level of buying activity from insiders?
To create this list, we started with a universe of about 200 companies reporting significant insider buying over the last six months.
To refine the list, we collected data on institutional transactions, and identified the names that have seen significant inflows during the current quarter.
And to further refine the list, we collected data on short-seller trends, and identified the names that have seen a significant decrease in shares shorted during the current month (i.e., short-sellers think the upside of these stocks outweighs the downside)
Sophisticated investors, like hedge fund managers and short-sellers, think these names are going higher. And insider executives seem to agree -- do you?
List sorted by relative size of insider buying. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Complete Genomics
2. American International Group
4. Six Flags Entertainment
5. Equity One
6. Lincoln Educational Services
7. Merge Healthcare
8. Kratos Defense & Security Solutions
9. Harvard Bioscience
12. Overseas Shipholding Group
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Short and insider data sourced from Yahoo! Finance. Institutional data sourced from Fidelity.