Follow the Insiders

 | Apr 30, 2014 | 3:00 PM EDT  | Comments
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gain

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While I am a bit of news junkie, I try not to let it overly influence my day-to-day investing activities. This week, I am searching for reasonably valued securities that can provide much-needed cash flow. This more important than how much twitter did or didn't make in the last three months or what ADP thinks the job market is doing. News flow is only useful if it creates an opportunity to buy stocks cheaply or sell them dear.

Today, we are going to follow the insiders in our search for yield. Tracking insider buying is one of the most discussed and seldom used methods of picking stocks in the financial world. It is a well-documented market anomaly that has worked as well in practice as in theory but I can only count a handful of investors and traders that actually follow the insiders when buying and selling stocks. This morning, I sat down and ran a quick screen for companies that pay above average dividends and have seen strong buying by insiders in recent weeks.

The folks running the Russell Indices might not like the business development companies (BDCs) but the people running them sure seem to like these private equity like firms' potential. Standard and Poor's also gave the BDCs the boot and many of them have sold down as a result. Insiders have responded by opening their checkbooks and buying stock.

Prospect Capital (PSEC) is a BDC that finances and lends to middle market companies for mezzanine finance, emerging growth, buyouts, recapitalizations, turnaround and growth capital. The company also makes real estate investments with a preference for multi-family projects. I have owned at least a few shares of this name since 2007. Since then, the company has done several capital raises and the stock has had its up and downs. The entire time it has paid out a massive flow of dividends. If the stock went to 0 tomorrow I would be a little better than break-even as a result of all the cash I have collected along the way. Right now, you can buy the shares right around net asset value and enjoy a yield of over 12%. CEO John Barry clearly likes the direction the firm is going -- he recently spent more than $1 million to buy an additional 100,000 shares.

Gladstone Investment (GAIN) is a business development company specializing in buyouts recapitalizations, and changes in control investments. As of the end of the year they had invested in 26 companies across 14 states and 13 industries but they did add several companies to the mix in the first quarter. The company makes both debt and equity investments in portfolio companies, giving them not only a steady stream of cash to pay dividends and long-term upside potential that should be in line with private equity funds.

Right now, you can buy the shares at a discount to net asset value (NAV) and enjoy a current dividend yield of 9.27%. Insiders, including the president, CEO and CFO have been consistent buyers of the stock in the past six months, so they must believe the future for increased dividends and capital appreciation is pretty bright.

Apollo Investment (AINV) is another BDC that I have owned for some time. I am a big fan of the investment funds that have a close ties to the large private equity firms. I think they see more deal flows and can be more selective than their competitors. This BDC is affiliated with one of the industry leaders, Apollo Global Management (APO). Right now, you can buy the stock at a discount to net asset value and the current dividend yield is over 10%. Insiders, including the CEO and CFO, have cracked open their wallets and bought additional shares of the company in the past three months and income oriented investors might want to join them.

Following the insiders makes sense most of the time. Following the insiders when they are buying out-of-favor high yield investments like the business development companies is probably one of the best ways to find the dividends needed to meet your investment goals and requirements.

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