Originally published Saturday, June 30, 2012 at 8:00 PM
How to buy stock like a company insider
Before making a trade based on buy transactions by corporate executives, here's another tip to keep in mind: Put the dealings in perspective.
MarketWatch
Timely purchases
MarketWatch asked InsiderScore to mine its database for 2012 buys made by executives or directors who have demonstrated a knack for timely purchases or continue to build positions in companies they are involved with. No CEOs made the cut. Here are the people InsiderScore found:Barry Diller, Coca-Cola
Talk about buying with conviction. Coca-Cola director Barry Diller has been buying shares of the beverage giant as if there will be a run on Coke at the supermarket. Diller, who runs media conglomerate InterActive Corp., has dropped $114 million to acquire nearly 2 million shares in a series of transactions since March 2009.
Those buys have earned a 32 percent return, according to InsiderScore. With each transaction, Diller has bought Coke shares at an even higher price — his latest being a 264,000-share purchase on April 27 for $20.3 million. Coke was trading near a 52-week high at the time.
Steven Webster, Basic Energy Services
Steven Webster is the chairman of Basic Energy Services, a Texas-based company that provides well-site services to oil and gas producers. He's been buying Basic Energy's shares near its 52-week lows, spending $2.7 million to boost his total holdings in the company to 766,100 shares.
Webster is a veteran of the energy business with a ground-level view of industry trends. He sits on several other boards, including Goodrich Petroleum and Hercules Offshore.
James Cornelius, Mead Johnson Nutrition
Mead Johnson Nutrition Chairman James Cornelius keeps acquiring shares of the baby-food maker whose brands include Enfamil and Choco Milk. On May 23 he scooped up 10,000 more shares; at $81.02 a share, he laid out $810,200.
The transaction came a month after Mead Johnson raised its 2012 forecast and after the stock had backed off a 52-week high.
Cornelius has been a steady buyer, with eight transactions dating back to the company's spinoff from Bristol-Myers Squibb in February 2009.
Like Diller, Cornelius keeps buying at a higher price. According to InsiderScore, he's generated a 53 percent return on the $4.3 million spent on the shares.
Reuben Mark, Cabela's
During May, Reuben Mark was busy stocking up on shares of Cabela's, the Nebraska-based retailer of hunting and fishing gear. Mark, a Cabela's director, paid $1.8 million to acquire 80,000 shares.
InsiderScore says Mark has been a smart buyer, with Cabela's stock price rising in all five of the previous quarters he has bought. Mark is the former CEO at Colgate-Palmolive. He joined Cabela's board in 2004.
SAN FRANCISCO — When CEOs or corporate directors plunk down cash to buy shares of their company, it can speak volumes.
Such insider buying can mean executives believe their company's shares are undervalued or its future is brighter than people realize. Or the insider believes this is the best use of their money compared to other investments.
For investors, insider buying is reassuring. The motives are more apparent, much more so than insider sales.
Executives can sell stock for reasons that investors may never know. Perhaps they want to build a dream mansion or purchase a luxury yacht. A bigger fear for investors is the company will report poor results or the shares are overpriced. When an executive sells, the company rarely says why.
Insider buying at Russell 2000 and Standard & Poor's 500 companies perked up in April and May, according to InsiderScore, which analyzes stock purchases and sales by executives and directors for money-management firms.
The volume of buying activity prompted InsiderScore to issue an "industry buy inflection" indicator for the first time since August 2011. When it comes to insider buying, this is InsiderScore's strongest quantitative macro signal.
"Insiders as a group are very predictive when it comes to buying. When we see widespread buying across sectors, it's a good indication," said Ben Silverman, InsiderScore's director of research.
To be sure, current insider buying doesn't have the intensity of last August, a time when insider buys climbed to a multiyear high and insider stock sales were extremely low, according to Silverman. Since Jan. 1, there's been enough insider selling to mute the bull horn on U.S. stocks.
By law, insider buys or sales must be reported to the Securities and Exchange Commission within 48 hours, or two business days. For investors, this short window makes these transactions useful to track. The disclosures are made in a Form 4 filing.
The Form 4 can be confusing. First, see Table 1 where the person's name is given. Then look at Column 3. If the letter "P" is listed, then the insider bought shares of their company. If the "P" is missing, then it's not an insider buy.
Column 4 shows the share purchase price. Column 2 gives the date. Sometimes in Column 3, the letter "A" will be listed. That's a stock award granted from the company. Do not treat this action as an insider buy.
Before making a trade based on buy transactions by corporate executives, here's another tip to keep in mind: Put the dealings in perspective.
Check to see how much the executive or director earns a year and compare that against how much money they shelled out to buy their stock. Public companies list executive compensation in annual proxy statements. In regulatory lingo, this filing is called a "DEF 14A." Search for proxy statements on SEC's Edgar System.
For instance, an insider buy might not be that big a deal for a corporate chieftain at a Dow 30 or S&P 500 company who may earn millions of dollars a year in salary, plus a bonus and stock awards.
However, the situation could be quite different for CEOs of smaller public companies. Their salaries usually are far less than their counterparts at larger companies. So a decision to part with their money could be meaningful and well worth further exploration.
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