Earlier this week, USA Today ran an article about insider stock buying, noting that CEOs of 16 top companies had been busy loading up on their company’s shares. The report noted that these executives bought their stock in the open market at market prices, instead of purchasing it at deeply discounted prices as a result of exercising stock options. That’s usually a good sign since the CEOs are digging into their pockets to buy at market prices—and often seen as a signal that the company’s fortunes are improving.

We have recommended seven of those 16 companies in our Wall Street’s Best advisories in the past few months.

It isn’t too unusual to see company insiders buying shares when the market is down. After all, it makes lots of sense to ‘buy low.’

How to Know when Insider Buying is Important

And that may simply be the reason for the ramp up in buying. But there are other catalysts for insider buying that might spell opportunities for investors to load up on shares of some of these companies. They include:

1.Plenty of research exists that points to a direct correlation between increased insider trading—the legal kind—and directional market shifts. In other words, when lots of folks who are ‘in the know’ start stockpiling their company shares, there’s a good chance that they see their companies gaining ground. They’re in position to see positive signals such as growing backlogs, declining inventories, supply shortages, etc. (And vice-versa. When these people start fire-selling their shares, you may want to rethink your overall market strategies to prepare for a possible market drop.)

2.CEOs, CFOs and other top insiders are often required to buy shares as a condition of their employment. What’s important to note is when they make big and unusual purchases of their company stock—especially when they are market, and not option transactions.

3.But it may also be valuable to watch what other company insiders—such as line supervisors or employees with direct product production responsibilities—are buying. These folks generally have the pulse of the company’s fortunes; they see demand and supply up close. So if they start buying big chunks of stock, it may be important.

Some Insider Buying can be Ignored

There have been plenty of cases when companies or individual executives have announced they are making big share purchases. Sometimes those announcements are pure hype. So make sure you check reliable sources to see if the purchases have actually been made. (More on that in a moment).

Option exercising is always interesting. I marvel at just how generous some of these programs are. A lot of them are fabulous perks for the executives—giving them the ability to buy shares at rock-bottom prices, and then when the shares rise, these insiders can really clean up. But that kind of insider buying is generally business as usual, and doesn’t tell us much about a company’s prospects.

Some Extra Tips

Here are a few more ideas on following insider buys:

• Identify the purchaser. Certainly, the C-suite officers should be cognizant of what’s going on with their company. Not so much, the directors. Consequently, I don’t pay a lot of attention to what the directors are buying and selling.

• Watch for good-sized buys from several insiders—not just one or two. The more, the better.

• Insider buying in smaller companies is usually more telling. Generally, insiders will own a pretty good portion of company stock at small- and mid-sized businesses. For instance, utility companies and conglomerates often have less than 5% insider ownership. So any exec making purchases would have to buy a whole lot of stock for the market to notice it. However, if a small regional bank suddenly has several insiders buying big blocks of shares, that may be very meaningful. Perhaps a sale of the company is in the offing, or grand expansion plans are around the corner. But please know that because of strict SEC rules regarding insider trading, you most likely won’t see immediate action following large purchases. It may take a while for any upcoming event to occur that would make the stock price rise.

Sources for Investigating Insider Buying

The SEC requires several forms from insiders, including Forms 3, 4, 5 and 144. You can access the information from these filings at any number of websites, but my favorite is: https://financeyahoo.com – Just type in your stock symbol, look down the left menu, and you can click on Insider Transactions and Insider Roster to find out which insiders are buying or selling, the size of the transactions, and how many shares each one currently holds.

Many of our contributors to Wall Street’s Best use insider buys as one of their screens in determining if a stock is buy-worthy. In most cases, it’s just one characteristic that can influence a recommendation—not the primary or sole reason for buying. In any good analysis, it’s important to look at the whole picture—not just one parameter. But if you see a lot of insiders rushing into the shares, it may be worth your while to delve a little deeper to see if the company meets your investment strategies and goals.

You may want to start with the above stocks—all were recently recommended by our Wall Street’s Best contributors, and most are touted by analysts as having double-digit price gains in their futures.

Happy investing,

Nancy Zambell
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks