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Insiders, naturally, work at the companies in question and have more knowledge about the firm than outsiders. They are classified as top officers, members of the board of directors, and shareholders with more than 5% interest in a firm. When they put their own money on the line to purchase their company's shares it indicates they are bullish about the firm's future, and believe current share price is undervalued.

With that in mind we began building the stock list below with a universe of firms seeing significant insider buying activity representing at least 2% of share float over the past six months.

Two percent may seem minimal, but considering these are often individual investors putting enough money on the line to collectively acquire that percentage of float is significant.

And why six months? A 1968 study by Professors James H. Lorie and Victor Niederhoffer showed that when number of insider buyers is at least two more than the number of insider sellers "the stock can be expected to outperform the market during the next six months." Furthermore, "insiders tend to buy more often than usual before large price increases and to sell more than usual before price decreases."

A number of more recent studies have supported these findings, including a 1976 study by the University of Michigan's Joseph Finnerty. It concluded insider purchases have abnormal returns of 4.1% in the first 6 months (and insider sales have returns of -2.4% in the first 6 months). Insider Monkey adds that a 2003 study concluded insider trading purchases beat the market by 11.2% per year. Not bad.

Insiders are like every other investor, in that they prefer to avoid taking on a large amount of credit risk. With that in mind, we took our universe and looked at balance sheets for companies with cash holdings that exceed more than 4 quarters of average operating expenses. With such large cash cushions the companies in question could run operations (on average) for more than four quarters without earning a single penny in profit.

The List

Four companies made our list.

For an interactive version of the chart, click play below. Analyst ratings sourced from Zacks Investment Research.

Inside management thinks these cash-rich companies are due for a rally - do you agree? Use this list as a starting point for your own analysis.

1. Aegerion Pharmaceuticals, Inc. (AEGR): Engages in the development and commercialization of novel therapeutics to treat severe lipid disorders.

  • Market cap at $1.13B, most recent closing price at $39.24.
  • Over the last six months, insiders were net buyers of 624,767 shares, which represents about 2.58% of the company's 24.18M share float. The 2 top holders of the stock are Alison Kiley, and Advent International Corp.
  • Average quarterly operating expense over the last five quarters at $12.64M, vs. most recent cash and short term investments at $95.46M, implies a Cash / Avg. Operating Expense ratio at 7.55.

2. Hansen Medical, Inc. (HNSN): Develops, manufactures, and markets medical robotics designed for accurate positioning, manipulation, and stable control of catheters and catheter-based technologies.

  • Market cap at $158.66M, most recent closing price at $2.0.
  • Over the last six months, insiders were net buyers of 967,278 shares, which represents about 2.34% of the company's 41.25M share float. The 2 top holders of the stock are Larry Feinberg, and Frederick Moll.
  • Average quarterly operating expense over the last five quarters at $10.24M, vs. most recent cash and short term investments at $41.17M, implies a Cash / Avg. Operating Expense ratio at 4.02.

3. Janus Capital Group, Inc. (JNS): Offers individual investors and institutional clients asset management services.

  • Market cap at $1.74B, most recent closing price at $9.12.
  • Over the last six months, insiders were net buyers of 30,846,700 shares, which represents about 17.11% of the company's 180.29M share float. The 2 top holders of the stock are Dai Ichi Life Insurance, and Richard Weil.
  • Average quarterly operating expense over the last five quarters at $157.54M, vs. most recent cash and short term investments at $737.5M, implies a Cash / Avg. Operating Expense ratio at 4.68.

4. Targacept, Inc. (TRGT): Engages in the design, discovery, and development of novel Neuronal Nicotinic Receptors (NNR) Therapeutics for the treatment of diseases and disorders of the central nervous system.

  • Market cap at $148.26M, most recent closing price at $4.41.
  • Over the last six months, insiders were net buyers of 2,023,840 shares, which represents about 8.88% of the company's 22.79M share float. The 2 top holders of the stock are Investment 10 LLC., and BVF Partners LP.
  • Average quarterly operating expense over the last five quarters at $19.02M, vs. most recent cash and short term investments at $184.93M, implies a Cash / Avg. Operating Expense ratio at 9.72.

* Insider ownership information sourced from Yahoo Finance, accounting data from Google Finance, all other data sourced from Finviz.

Source: Insiders Are Buying These 4 Cash Rich Companies