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Friday, August 24, 2012

Follow the Leader

In addition to never learning to play the piano or hit a curve ball I really regret never learning to program. I love to sit down and play with market based ideas and concepts.  I have some friends who can have 20 years of data scrolled up and crunched in R before I can get the idea out of my mouth. On my own however I have to crunch it all though good old Excel and it can be a tad laborious. I am told it is painful to watch and I have invented new words during particularly cumbersome projects. I recently tested some ideas related to insider buying and I am happy to report that Jon Moreland’s databases at Insider insights make it easy even for me.

I have been playing around with a simple idea for a few weeks and testing verifies I am on the right path. The CEO and CFO of a corporation know more and the condition and plans of a company that anyone else. When they buy a large amount of stock in their company it would seem to be a significant event in my opinion. I am happy to report that my suspicions were correct. From 2008 to the end of 2011 riding the coat tails of the two top executives resulted in 75% winning stock picks with an average gain of more than 80%. So far in 2012 we have 36 of 48 winners with an average gain of 74% according to the database test.
I only count direct open the checkbook and buy in the open market purchases. Option exercise, stock grants and other forms of compensation are not included in my search. The individual buy has to be at least $50,000 in value to make the list. For the purposes of the study the shares are held until then of the calendar year. That actually caps the potential gains but it also saved me about two hours of wrestling a spreadsheet. It appears that a longer holding period delivers higher returns confirming that insiders tend to be long term investors in their company shares.

 Looking at the data we can often go many weeks, and even months, between buy signals. However ion the past couple of weeks we have seen some strong buying activity that might be profitable trading and investment opportunities. The largest purchase was of course the monster $17 million dollar investment by JP Morgan (JPM) CEO Jamie Dimon. Although a large chunk of the purchase was funded by the sale of preferred stock Mr. Dimon opened the checkbook and added about $3.6 million to buy shares. The last time he bought shares was in January of 2009 and although they fell sharply after he purchased the stock recovered and he now has a gain of more than 50% on those shares.

We also saw buying on one my favorite long term banking names. Both the CEO and CFO of First Niagara Financial (FNFG) have been buyers of their company stock in the past week. CEO John Koelmel purchased 25,000 shares and CFO Gregory Norwood added 10,000 shares to his stake in the company.  Two directors were also decent size buyers of the shares recently. The stock currently trades at a small premium to tangible book value but with an equity to assets ratio of 13 and nonperforming assets below 1% of total assets the bank is a solid investment. It’s up sharply today but I would be a buyer in a market decline with the intention of holding for many years.

Boston Scientific has struggled over the past few years. The company has struggled in the very competitive market for hear stents and although they have several new products for the cardiac rhythm management market sales have yet to take off in a meaningful way. 45% of the company’s revenues are form the stent market and BSX is struggling to gain market share in a crowded field. The CEO, William Kucheman, appears to think that the new products and increased exposure to emerging market swill lead the company fortunes and stock price higher as he recently opened his checkbook and bought an additional 10,000 shares of stock. Last week President Michael Mahoney also purchased 22,000 shares of BSX in the open market. I like this stock as a long shot stock pick for aggressive minded patient investors.

Following the top executives of a company when they buy shares is not foolproof but it does tip the odds in your favor. Always do your homework but it makes sense to track CEO and CFO open market stock purchases.

Originally Published on RealMoney on 8-3-2012

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