Inside Plays Pay Off

 | May 07, 2013 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

blmt

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banc

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keg

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sfy

Focusing on buying by the top two executives in a given corporation as well as large cluster buying by officers and directors has turned up some solid investment and trading ideas. I have been tracking and testing CEO and CFO purchases for several years now and the results have been spectacular. Over the past five years, the returns have consistently been well above the market with about 75% of the stocks showing gains over the next year or so.

Reviewing the insider buying by the two top chiefs during 2012 has uncovered another winner. During the year, there were 365 occasions where the CEO or CFO purchased more than $50,000 of stock in an open market purchase. On 302 occasions, the stock went higher for a win rate of more than 80%. The average winner went up by almost 70% while the average long trade fell by about 15%. Buying all of them and holding until the end of the year resulted in an average gain of 59%. That is the fifth winning, market-beating year in a row for this strategy.

I do not care what is popular or what everyone else is doing today. I really only care about what works and adds dollars to my account balance. With the insider buying and selling lists as my universe and I apply my statistical or technical measures to these stocks. As a long-term value investor, I tend to use the insider figures as a confirming factor for my asset based stocks as well as my longshot picks. The insider activity can often act as a catalyst to attract the market's attention and unlock value.

Several stocks that I have mentioned recently are attracting top officer buying. Calamos Asset Management (CLMS) is an extremely cheap stock: The shares are trading at about 2x free cash flow and the company is using the cash to pay dividends and buy back stock. The CEO has been a large buyer of the stock as has the CFO and several directors. I am stubborn and probably won't be a buyer of the stock until it drops below tangible book value, but this is a very good company run by a very successful investor.

I have owned BSB Bancorp (BLMT) for several months now, as the stock more than qualifies for the trade of the decade based on its asset values and balance sheet strength. The stock trades at 87% of tangible book value and has a nonperforming loan ratio of less than 2. Several insiders, including the CEO, have been buying stock in the past several weeks.

Small banks are one of two groups attracting a lot of insider interest of late. Peapack Gladstone (PGC) is a New Jersey-based bank that is seeing buying by both the CEO and CFO is recent weeks. Longtime favorite First PacTrust Bancorp (BANC) is also seeing continued buying by the top officers. So is New York-based Suffolk Bancorp (SUBK). Smaller banks are my favorite long-term sector, so I am excited to see the confirmation from the executives who run these trade of the decade institutions.

The recent decline in shares of Key Energy (KEG) doesn't seem to bother the insiders. Several of them, including the CEO and CFO, bought shares in the oil service contractor after its recent earnings miss. The stock is cheap, trading at just 75% of book value and an enterprise ratio/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) ratio of less than 5. The company needs to see an increase in the number of drilling rigs in operation here in the U.S. for conditions to improve but when that finally happens, the upside is enormous.

Swift Energy (SFY) is another long term energy holding that has seen CEO buying in the past couple of months. The company is still transitioning from a conventional Gulf of Mexico company to more of an onshore unconventional play in the Eagle Ford region. The market does not seem pleased with the production mix at this point in time. Those who are running the company are more positive on its long-term prospects -- as am I.

Not all of the stocks that see insider buying by the CEO or CFO see their stock price go higher, but the majority of them do and the gains tend to be substantial. This type of buying activity is a great confirmation factor for me as a long-term asset based investor. In addition, I have no idea why traders do not focus more on these stocks. The probabilities are in your favor and if your trading methods can increase the probabilities it would seem to make more sense than chasing Apple (AAPL) all over the market.

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