One of the most important things to look for when investing is management friendliness towards shareholders. There are countless companies out there who are very adept at promoting their stock, but as we've seen with Enron, WorldCom, Adelphia, etc., following such advice is a very bad idea. Many lost their entire retirement assuming that upper-level management wouldn't lie to them. How, then, is it possible to determine whether management is acting in the best interest of the shareholders?
There are a few ways to do this. You could listen to conference calls and read through 10-K and 10-Q SEC reports. Unfortunately, not everyone can derive the information needed to make a decision from these sources. There is, in fact, a much simpler way to find companies that are truly aligned with their shareholders: by tracking insider buying.
Insider buying and selling is, quite simply, when high level insiders buy and sell stock of the company for which they work. Insider selling can be done for any number of reasons; sending their kids off to college, paying off a mortgage, purchasing a new house, or any other number of reasons. Insider buying, however, is far more useful to the intelligent investor. The only reason an insider would ever buy company stock is if they believed it was going to go up in value.
Although insiders are barred from buying (or selling) company stock based on non-public facts about their company, you can bet they know more about the economics of their industry than the average investor would. Not only that, but they know the inner-workings of the company and potential opportunities that exist, whether we're aware of them or not.
When an insider buys company stock, not only are they showing that they are confident the stock price will climb, they are also increasing their stake in ensuring the company does well, which further aligns them with the shareholders. The probability for better dividends and stock repurchasing programs increase dramatically when those in charge have a direct and material stake.
Utilizing insider buying in investment selection is as much a defensive play as it is offensive. Do you think that the insiders of Enron and WorldCom were buying their own shares before the collapse? Certainly not. Do you think that once they buy stock, they won't use their cash to increase shareholder value? Certainly not.
As you can clearly see, a cornerstone to any worthwhile investing strategy is insider buying (as well as ownership). How do you find out which insiders are buying company stock, though? Each insider must fill out a form (SEC Form 4) whenever they purchase company stock. This allows average investors to see what insiders are doing.
Below, you will find a list of the top insider buys that took place on 12/31/07.
As always, don’t take these as recommendations, rather as a list of companies that should be researched further.