There is only one reason for Insiders to buy their own stock; they believe they can make money. When you combine insider buying and a stock price that's been beaten down, you may have an opportunity to invest alongside the people who know the most about the company's prospects. When executive insiders invest in their company's stock they are saying a lot.
Their lives, income, families, location, friends, colleagues, egos, reputation, net worth and maybe even retirement are connected to the success of the company they lead. Now they are taking something that's not related to the company "cash" and investing it in the same bucket. One has to be fairly confident, with their inside information and knowledge, of the outcome to make this move. Each of the companies listed below has executives that bought their own companies stock, the stock has been beaten down and they are worthy of closer look.
Source: Thomson Reuters
Chesapeake (CHK) is the largest natural gas producer in the country but natural gas is selling at the lowest levels of the last ten years. Chesapeake is the largest natural gas producer in the country but natural gas is selling at the lowest levels of the last ten years.
As you can see a number of insiders apparently think we are near a bottom and have acquired $5 million of Chesapeake stock for their own account. This excludes restricted stock and options granted. These purchases were for cash, they clearly believe the stock is cheap and they are buying it to make money.
Exco Resources, Inc (XCO) is an independent oil and gas company primarily involved in natural gas and active in the Haynesville Shale play. Billionaire, Wilbur Ross has been buying shares aggressively and now owns 13% of the Company and was just named to the Board. Last summer the Board rejected a proposed "go private" proposal led by the CEO and T. Boone Pickens at $18.50. Since then the stock has fallen to a 52 week low of $7 per share. Here is another opportunity where the company's valuation has been beaten down and insiders believe the stock is cheap.
Frontier Communications, Inc (FTR) is a telecommunications and internet service provider. Six officers purchased stock in mid 2011 at prices close to the 52 week hi. Now the stock has declined to half of its 52 week high. We should be watching what insiders do here for guidance; do they double down or lower their exposure and sell out?
Inergy, LP (NRGY) is a propane storage and distribution company and recently spun off 25% of a natural gas and natural gas liquids distribution business in an IPO, Inergy Midstream, LP, (NRGM). They currently pay a $2.82 per year dividend that yields 17% at current prices. The 17% dividend yield on Inergy is high and also risky, due to the dividend payments currently exceed operating cash flows. Four current and former officers have purchased $2.1 million of stock over the last three months. Once again the people who have inside information, who are in the know, are putting their cash into equity.
Web MD Health Corp. (WBMD) is an internet portal providing information and medical content to individual and health care professionals. They have 83 million visitors/month. Billionaire investor Carl Icon increased his position by $26 million in January 2012.
Of the small group here that I quickly identified, Inergy, LP and Web MD stand out given the size and timeliness of insider purchases. I like Chesapeake, however knowing the current status of natural gas I believe there is plenty of time to come back later and pick this one up at current prices or better.
I'm not saying that tracking insiders is a full proof plan of making money. Just because insiders are buying doesn't mean you should too. Maybe their miniscule purchases were just for show, intending to trick investors into buying the stock, and not a significant percentage of that person's assets. The top four officers at Frontier Communications made $6.5 million in 2010, is $695,000 a significant commitment? Plus they bought at the high for the year which makes you wonder, did they think a deal was happening that may now be blown?
Find stocks that have gone down significantly, where insiders are buying and you will have a better group to start with. Think of it as a way to flag companies out of the thousands of stock choices you have. Once you have identified (flagged) companies of interest and now you have to start connecting the dots and making sure the remaining company data matches and is in line with your investing criteria. Then from that basket of companies, choose the best and invest!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.