And even with the ugliness caused by the release of the banking stress tests last week, it doesn’t look like we’ll be seeing values plunge. There’s simply too much money sitting on the sidelines, and it’s slowly creeping back in.

Since 1987 the American Association of Individual Investors (AAII) has conducted a monthly survey on how we allocate our money between stocks, bonds and cash. And per the most recent survey, the percent of direct investments in individual stocks is at an all-time low of 17%, nearly half the historical average of 31%.

Thus, a mountain of cash remains on the sideline. If even a quarter of that cash returns to the market – and I suspect more than that will – we could feasibly march another 15% to 20% higher from here.

Investors who have been waiting for the perfect entry point could be quite disappointed to learn that we’re not going to get it. We may not see a second bottom or this “perfect entry point” everyone expects.

Even if there is a slight pullback, we may not see these price levels from March 6 again – realistically, in our lifetimes.

So what is a careful investor to do? Easy. Follow the time-tested steps we use to pick out undervalued companies in any market – including insider buying…

Insider Buying – The Best Buy Signal Investors Can Get

Quite simply, the single best buy signal that investors can get is strong insider buying. Heavy insider trading is the surest way you can tell if the management believes their company is undervalued.

• Insiders are the officers who run a company, the directors who oversee the officers, and 10% beneficial owners of the stock who are presumed to be more than ordinarily well apprised of the company’s business and future prospects.
• Insiders know virtually everything that can be known about the company they run. They know the pace of sales day to day. They know of new products in development. They know whether the company is a takeover candidate or is already getting unsolicited offers.
• They know everything that reasonably can be known about their company’s business prospects, employees, customers, suppliers and competitors…

In short, insiders have an unfair advantage when they go into the market to trade their own company’s stock shares. After all, they know not only all the public information about their company but a great deal of non-public information as well.

For this reason, the U.S. government requires all insiders to report their transactions to the SEC by the tenth day of the month following the month in which they buy or sell their company stock shares.

It’s how “Uncle Sam” helps level the playing field for smaller investors. It opens a window on what the insiders are doing with their money. It also gives us an insider advantage when deciding whether a value play truly is undervalued.

Why It’s Risky To Base Your Investment Decisions on Insider Buying

It’s important to be careful when basing your decisions on the movements of insider buying. They can easily give you mixed signals. And while insider buying is the clearest signal you can get, insider selling is about the cloudiest.

Take a look at most publicly listed stocks and you might be surprised at how many sales are being recorded. Every day executives and officers are selling their company stock. But unlike purchases, there are a number of reasons why.

It could be that these officers have a large amount of their salary given to them as stock. Many executives receive salaries of $1 and the rest of their multi-million-dollar compensation packages are paid in stock. The only way they get that money is through regular stock sales.

It could be that these individuals are going through a nasty divorce, putting kids through college, building a new house, supporting a family member, or even has a gambling addiction.

Either way, the point is clear: Insider stock sales are not a clear signal to sell.

Bill Gates has been a regular seller of Microsoft (NYSE: MSFT) for decades. So has Larry Ellison at Oracle (Nasdaq: ORCL). Yet if you’d held these stocks for the past 20 years, you would have done okay. In fact, you would have earned many, many times your original investment.

Even in the case of Enron where company executives were dumping billions of shares en-masse’, we cannot guarantee that there were no other motivations outside of the companies performance.

On the other hand, there is only one reason an insider purchases a stock: They believe it’s undervalued. That’s why insider buying is the best buy signal that you can get when trying to find undervalued companies.

Three Insider Buying Triggers To Watch For

Here are three “insider buying triggers” you should look out for:

• Purchases around price points. Keep an eye out for upper management, executives and directors consistently buying large amounts of stock around a specific price point. You’ll start to notice that they stick below a certain price level.
• Insider purchases relative to their current holdings. A director who owns a million shares, and who buys 10,000 more isn’t as interesting as one who’s buying two million more shares. Are they buying larger amounts than their current holdings?
• Salary levels of insiders. A director making $40 million who risks $30,000 isn’t as interesting as a middle manager that risks a majority of his annual salary on the same $30,000 purchase. The size of their purchases relative to their salaries lets you know how sure they are of their investment.

These are some of the biggest tips that the insiders give us that the markets are undervaluing a particular stock. By taking these simple cues, we can turn their insider knowledge to our advantage.

Insider Buying: The Best Buy Signal You Can Get

]]> http://www.contrarianprofits.com/articles/insider-buying-the-best-buy-signal-you-can-get/16490/feed 0 http://www.contrarianprofits.com/articles/insider-purchases-how-to-pick-a-winner-in-a-down-market/13250 http://www.contrarianprofits.com/articles/insider-purchases-how-to-pick-a-winner-in-a-down-market/13250#comments Tue, 10 Feb 2009 13:32:59 +0000 Alexander Green http://www.contrarianprofits.com/?p=13250 Alexander Green the investment director at the Oxford Club gives readers a great way to spot winning companies in a down market by using insider trading statistics. In this article he tells you where to look… what everything means…

And even the name of one inside-buying opportunity where the director of the company made the single–largest insider purchase in the nation.

This from Alex:

Last year was a disaster for most stock market investors. The S&P 500 fell 38%, its worst year since 1931.

The worst damage occurred in the fourth quarter. And the first quarter of this year isn’t looking much different.

We’re back within spitting distance of the November 20 low.

Yet I know a number of stock traders who are making good money…

The suit states that Cuban dumped his 6.3 percent stake in the company after getting word that the company planned a private offering the next day, which would dilute the value of existing shares.

Of course, Cuban disagrees with the lawsuit, saying “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”

The real irony here is that in 2006, Cuban started the website sharesleuth.com that is “aimed at exposing securities fraud and corporate chicanery”. Oops.

Without knowing the real facts of the case, I won’t pass judgment one way or the other. But one has to wonder, for a guy who is a billionaire, and has paid over $1 million in fines to the NBA (Cuban owns the Dallas Mavericks and sits courtside at almost every game) for voicing his opinion on the quality of the referees, is it really worth getting tangled up with the SEC over $750,000?

This likely won’t affect Cuban’s chance of purchasing the venerable Chicago Cubs franchise, as word is that he has no chance of getting approved, even though he was the highest bidder. He has simply ruffled too many feathers amongst NBA owners, and the Major League Baseball owners don’t want to deal with him either. That’s too bad, because Cuban has injected energy into the NBA and he could go a long way towards bringing excitement back to baseball.

Check out Cuban’s blog to get a bit more insight into his thoughts. It’s a nice mix of sports and business, and contains some good information.

Source: Another High Profile Case of Insider Trading

• The U.S. economy entered recession in April and will last a total of 14 months, according to a survey of economists by the Federal Reserve Bank of Philadelphia. The survey also predicted that non-farm payrolls would contract by 222,400 jobs during the fourth quarter, Reuters reported.

• Target Corp. (TGT) saw its profit drop by 24% in the third quarter, as fewer shoppers showed up at the retailer. Though slightly better than the average forecast, it marked the fifth consecutive drop in quarterly profit, Reuters reported.

• Merrill Lynch lowered its 2009 growth estimate for Brazil from 3.1% to 2.9%. Merrill cited a “massive depreciation” of Brazil’s currency, forcing the central bank to hold interest rates despite falling consumer demand, Bloomberg reported.

• Hong Kong officially entered a recession in the third quarter, with its gross domestic product contracting 0.5%, MarketWatch reported. The good news: that’s actually an increase from the 1.4% decline Hong Kong the economy saw in the second quarter.

• The Securities and Exchange Commission (SEC) yesterday (Monday) charged Mark Cuban, owner of the Dallas Mavericks and potential owner of the Chicago Cubs, with insider trading. The SEC filed a civil lawsuit against Cuban accusing him of selling his 6.3% stake in Mamma.com to avoid more than $750,000 in losses, The Associated Press reported.

• Lowe’s Cos. Inc. (LOW) yesterday (Monday) posted a 24% drop in profit from a year ago. The company earned $488 million, or 33 cents per share during the three months ended Oct. 31 – down from $643 million, or 43 cents per share, in 2007. Revenue actually climbed 1.4% to $11.73 billion.

• Industrial output 1.3% in October, the Federal Reserve said yesterday (Monday).  Output had plunged 3.7% in September – the largest drop since February 1946.

Source: Global Investing Roundups Tuesday, November 18th, 2008