Insider Buying: When To Follow, And Not To Follow, The Bandwagon

 |  Includes: DEI, HK, HOTT
by: StockRiters

As an outside investor, I do my own fundamentals research; I follow company news, study their financial statements and read their annual reports. However, I am always painfully aware of the fact that as an outsider, I am at a disadvantage compared to a company insider. Although it is illegal to profit from non-public information, rumor mills run their full course around the water coolers in every company, and insiders are privy to those tidbits of information that make or break a trade.

This is why insider trading data is important for me. With proper disclosure, insiders are allowed to transact in their company shares. Since these insiders are required to disclose their trades through Form 4 filings with the SEC, I can read up information about the stocks which are either being lapped up or dumped by their insiders. If a director has enough confidence in her company to buy a lot of its stocks, that is a positive for the company as far as the investing public is concerned.

However, that may not always be the case. The following 3 stocks were chosen to illustrate this point. While Halcon Resources (NYSE:HK) and Hot Topic (NASDAQ:HOTT) show insider buying and are legitimate investment opportunities, Douglas Emmett Inc. (NYSE:DEI), although showing some insider buying, has more to it than meets the eye. While one company director has purchased a few shares of the company, investors need to note that other indicators do not show it as a good buy. On the one hand, it has a very high P/E ratio, and on the other, many other insiders have actually been unloading the stock.

Halcon Resources: The stock is trading at $7.55 in the early trade, up 5.59 percent from its previous close of $7.15. This independent energy company has a market capital of $1.58 billion. The company director James Christmas reported buying 100,000 of its shares at the average price of $7.24. Halcon Resources also announced the pricing of its underwritten secondary offering. The company has priced the secondary offering at $7.00 per share. The company is not selling any shares under this offering and neither will it receive any proceeds. Its underwriters will have the option to purchase up to 5.25 million additional shares from the company shareholders willing to offload their holding. The size of the offering has been pegged at 35 million shares.

Halcon Resources has appointed JPMorgan, Goldman Sachs and Barclays as its joint book-running managers. The stock seems solid as the company recently completed AM Easterling-Gresham A 1H in Leon County, Texas. The company is already running three operated rigs in the area and plans to add up to two more rigs this month. Equity analysts at Stephens initiated coverage for the company with 'Overweight' rating. Similarly, Capital One fixed the stock price target at $12.

Hot Topic: The company itself may be geared towards teens and youngsters, but the stock is meant for pro play. Two of the company directors, Matthew Drapkin and Steven Baker, recently bought 51,553 shares each at the average price of $9.12. The stock is currently trading at $9.30, up 0.27 percent from its previous close price of $9.27.

Hot Topic traded in the range of $6.44 and $10.73 in the past 52 weeks. It reported its latest Earnings per Share at $0.35. The retail store chain recently announced the resignation of its Chief Store Office Jerry Cook, and it has yet to announce a replacement. Despite, this shake up, the retailer is looking forward to an action packed holiday season. Hot Topic not only announced solid quarterly results recently, but it also has generally positive recommendation from equity analysts. Susquehanna set the stock price target at $15.00 and its directors' recent purchases have reaffirmed my faith in this stock.

Douglas Emmett Inc.: This REIT Company not only saw healthy insider trading but also announced dividend payment. The company announced quarterly cash dividend of 15 cents per share. The record date for this has been set at September 28, 2012 while the payment would be made on October 15, 2012. However, another news of importance was the purchase of 3,100 shares by the company director William Simon Jr. The purchase was made at an average price of $23.95.

However, lately, the company had been seeing its insiders offloading the stock. In the last 4 months, a majority of the insider transactions in this stock were sell transactions. The stock trades at a Price Earnings ratio of 209.74, so despite the recent inside buying, I find it difficult to put this stock on my "Buy" list. In the early trade, the stock is trading at $24.67, up 1.36 percent from its last close. It has traded in the range of $15.10 and $24.70 in the past 52 weeks. The stock is rated Underweight by Barclays Capital and was given a price target of $24, which it already has achieved. So at the current price point, I do not see much upside to this stock. I am not really sure I understand why Mr. Simon took a position in this stock - if that was a confidence-building measure, I must say it has not succeeded, at least for me. However, Douglas Emmett does provide a reasonably good Dividend Yield ratio of 2.50 percent.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.