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Roberto Pedone from Thestreet.com highlights five stocks with strong insider purchases -- indicating executives' belief that their company has big upside potential. Early in May, Pedone came up with his top picks and we have had two months to see what the performance has been. Of course that is far too short but it is worth starting to track these portfolios to see how good a measure of performance the insider buyer is.

The key word in that last statement is "belief." Just because a corporate insider believes his company's stock is promising doesn't make it so. It is the large institutional money managers running big mutual funds and hedge funds that drive stock prices. That said, many savvy stock operators will follow insider buying activity when they agree with the insider -- it's important to monitor insider activity, but it's critical to ensure that the trend of the stock coincides with the insider buying.

Here are Roberto's picks:

  • Pacific Sunwear (NASDAQ:PSUN), a specialty retailer rooted in the action sports, fashion and music influences of the California lifestyle. This stock has been absolutely crushed in 2011, with shares off by around 37%, so clearly insiders are finding some value
  • Walter Energy (NYSE:WLT), a producer and exporter of metallurgical coal for the global steel industry that also produces steam coal, coal bed methane gas (natural gas), metallurgical coke and other related products. This stock hasn't done much so far in 2011, with shares virtually flat on the year
  • Nasdaq OMX Group (NASDAQ:NDAQ), a global exchange group that delivers trading, exchange technology, securities listing and public company services across six continents. This stock is off to a decent start in 2011, with shares up around 12%.
  • People's United Financial (NASDAQ:PBCT), which operates as the bank holding company for People's United Bank. This stock is down so far this year, with shares off by around 3%.
  • KeyCorp (NYSE:KEY), which provides a range of retail and commercial banking, commercial leasing, investment management, consumer finance and investment banking products and services. This stock has pretty much done nothing in 2011, with shares down around 3%.

This is mainly a "going forward" portfolio -- let's see how well Roberto has done his homework and whether these picks spike. We will enter this portfolio and compare it with the Fool's Matt Koppenheffer's selection of what he considered five stocks for long term dividend performance. Bear in mind this this is likely to be something that will show growth in the future and will determine how effective insider buying strategies are.

Company

Dividend Yield

Johnson & Johnson (NYSE:JNJ) 3.4%
McDonald's (NYSE:MCD) 3%
Kimberly-Clark (NYSE:KMB) 4.1%
Sysco (NYSE:SYY) 3.3%
Mattel (NASDAQ:MAT) 3.5%

We will also compare this with our ETF dividend portfolio benchmark:

Asset

ETF in this portfolio

REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
CASH CASH
FIXED INCOME TIP (iShares Barclays TIPS Bond)
Emerging Market VWO (Vanguard Emerging Markets Stock ETF)
US EQUITY DVY (iShares Dow Jones Select Dividend Index)
US EQUITY VIG (Vanguard Dividend Appreciation ETF)
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx)
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd)
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond)

When we take a long term view of this portfolio to create a history, we find that by the time we come to 2011, WLT has become the dominant stock in the portfolio, accounting for some 78% of the value. Tracking this going forward would be less meaningful as the other stocks would have a limited play. So we created another portfolio where the tracking started at the beginning of 2011 to see how it performs with a more balanced portfolio.
Portfolio Performance Comparison

Portfolio/Fund Name

1Yr AR

1Yr Sharpe

3Yr AR

3Yr Sharpe

5Yr AR

5Yr Sharpe

Street's May 5 Stocks With Big Insider Buying Long term 75% 217% 2% 3% 14% 26%
Fool's 5 Dividend Payers to Save your Portfolio 26% 235% 14% 68% 14% 69%
Retirement Income ETFs Strategic Asset Allocation Moderate 21% 218% 6% 30% 6% 27%
Retirement Income ETFs Tactical Asset Allocation Moderate 16% 172% 12% 97% 11% 81%

Three Month Chart

click to enlarge

One Year Chart Three Year Chart Five Year Chart

We see that over the long term, this portfolio is a heart stopping roller coaster that has delivered reasonable returns albeit with a lot of volatility. We can also see that in the shorter run, these stocks have not lived up to their insiders' hopes -- at least for the moment. The other portfolios deliver reasonable results without the huge spikes in volatility.

We will continue to track this portfolio to see whether these insiders know what they are doing.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: Author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Tracking 5 Stocks With Heavy Insider Buying in May