CHAPTER 16
Stock Research Checklist—Insiders
No one knows a company better than insiders. Therefore, you need to give special attention to insider buying activity.
Did an Insider Buy the Stock Recently?
Insiders buying the company stock may mean one of the following:
- Insiders feel that the company’s stock is undervalued compared to the company’s intrinsic value.
- The company stock price is fairly valued, but the insiders feel that the company’s future prospect is going to improve significantly. Therefore, the current price is going to be a bargain when you are considering future earnings.
Basically, insiders think that the current price of the stock is undervalued and that is why they are buying their own company’s stock. You need to take these activities as a positive event. When you are analyzing companies, if you see that many insiders bought the stock recently, that is a great thing. This information is easy to come by; you can get insider activity on all of the major financial web sites.
On finance.yahoo.com, type the stock symbol, click “Get Quotes”, go to the ownership section, and then insider transactions, and you can get information on transactions performed by the insiders. You can click on the insider’s name and you can check that insider’s historic transactions. Most of the time, the stock price improves within 3 to 12 months of the insider purchase date.
Here is a real life example: I generated about 20 times my fund’s initial investment in Select Comfort Corp. (SCSS), ...
