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To start with our conclusion: It depends. And yes, you still have to do your due diligence - there is no real shortcut.

Peter Lynch famously said that the insider has only one reason to buy - they (the insider) think the stock will go up. However, will you really make money if you blindly follow corporate insiders' purchases? Let's look at an example.

The tables below lay out purchases by prominent insiders in 2011 and 2012 of their company shares. The tables only include corporate insiders' purchases in the open market, and do not include shares awarded by the company.

Table 1: Insider William C. Ford Jr., Chairman of the Board of Ford Motor Company (F)

Date

Purchase Price

Number of Shares

Total Amount

09/06/2011

$10.11

25,000

$252,750

09/12/2011

$9.95

25,000

$248,750

11/21/2011

$9.89

25,000

$247,250

Ford Share Price EOD 8/2/2012: $8.91
52-week range: $8.83 - $13.05

Table 2: Insider Edward Lampert, Chairman of the Board of Sears Holdings (SHLD)

Date

Purchase Price

Number of Shares

Total Amount

01/09/2012

$29.20

4,675,617

$136,528,016

01/10/2012

$30.40

182,900

$5,560,160

01/12/2012

$31.20

105,650

$3,296,280

Sears Share Price EOD 8/2/2012: $48.51
52-week range: $28.89 - $85.91 .

Table 3: Insider John Hess, Chairman of the Board of Hess Corporation (HES)

Date

Purchase Price

Number of Shares

Total Amount

01/30/2012

$54.78

91,250

$4,998,675

04/30/2012

$52.02

48,000

$2,496,960

Hess Share Price EOD 8/2/2012: $46.58
52-week range: $39.67 - $67.88

If you'd followed these three big-name corporate insiders' purchases and held them until today, you would've only made money from Sears Holdings.

Know the Insider

The Chairman of Sears Holdings, Edward Lampert, is a well-known investor who formed ESL Investments, a hedge fund based in Connecticut. So in a way, you may consider him a more opportunistic insider than William C. Ford, Jr. After all, the Ford Company bears Mr. Ford's name, and pride in family name and entrepreneurial optimism may lead him to keep buying shares, no matter what!

Be Aware of Market Conditions

Markets peaked around April 2012 from a low in December 2011. So if you watched market conditions and you had bought Ford and Sears following the insider trades in fall 2011 and early 2012, you could potentially have sold Ford on April 2, 2012 at $12.50 for a nice profit, or Sears at $83.43 on March 15, 2012, or $62.05 on May 1, 2012 for a really nice profit. However, even though the market peaked, you would still have made almost no money from Hess Corp., which stayed in the mid-$50's in April and is currently trading at $46.58.

In another example, during the financial crisis in 2008, Dr. K.S. Lu, CEO of a little-known Texas-based company called Diodes Inc. (DIOD) purchased millions of dollars worth of shares from $3.60 to $5.10 and sold them at $34 in 2011. Clearly, 2008 was a good time to buy quality companies, and corporate insider purchases were good indicators for investors doing their research.

Similarly, Apple (AAPL) director Robert Iger purchased 2,670 shares of AAPL at $374.48 (worth about $1 million) on Nov. 29, 2011. While at that time you might have thought that a stock price of $300 was too pricey for Apple, the current price of $607.79 speaks for itself.

These examples show us that blindly following corporate insiders' purchases doesn't always pay off, but if you use insider trades as an element of your analysis, following insider trades may give you an advantage in the market. As Martha Stewart might say - or not -, it's a good thing.

Source: Is It Possible To Make Money By Following Corporate Insider Stock Purchases?