I'll Buy What They're Buying

 | Jul 11, 2013 | 3:00 PM EDT  | Comments
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Stock quotes in this article:

clms

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PSEC

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kmp

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bbep

Today I will focus on what has become one of my favorite screens related to insider activity -- I have tested it back to 2008. When CEOs or CFOs purchase their own company shares in the open market, it is highly probable the stock will go up.

This simple strategy has beaten the market solidly with an average of 75% winning trades over a one-year hold. I use this in my value searches. A stock under book with CEO or CFO buying is a buy no matter what the market, the economy or the Fed have been up to of late. If I were a trader, my universe would revolve around stocks with this type of buying.

In the last 30 days, we have seen some interesting top executive buying. The big two at a wide variety of income vehicles are snapping up shares as rising rates have pushed them lower. The list has a strong representation in some of the oil and gas related MLPs, including Kinder Morgan (KMP), BreitBurn Energy (BBEP) and Linn Energy (LINN). I am not a big fan of these securities at the current levels, but those who favor MLPs might want to pay attention. The people who know the most about the company are betting big that the shares will recover over the next year.

Business Development Companies (BDCs) are seeing strong insider demand as well. These companies seem to be on something of a sweet spot to me. If rates stay very low, they will benefit from being lenders of last resort as bank credit remains tight; if the economy improves enough for the Fed to consider tapering its quantitative easing program, the increase in economic activity will create additional loan demand and improve the condition of existing portfolio companies.

Prospect Capital (PSEC), Medley Capital (MCC) and Fifth Street Finance (FSC) have all seen their top two executives dig into their wallets and buy stock in the last month. Some large institutional investors are taking an interest in the BDCs as well. David Einhorn of Greenlight Capital owns $2 million of Fifth Street in the first quarter. Citadel has a position in both Fifth Street and Prospect Capital,

Some real estate related companies are also seeing top dog buying. Rouse Properties (RSE) does not appear particularly cheap to me, as it is trading at 2x book value, but both the CEO and CFO have made open market purchases recently. The company owns 30 malls in 29 states, so, apparently, they feel more positive about the improvements in commercial real estate and consumer shopping than I do. Rouse is a rare battleground stock: Insiders are buying as short sellers and loading up with 26 days' worth of average trading volume sold short. The company was spun out of the mess that was General Growth Properties (GGP) last year and shorts are not as confident that owning malls in secondary markets is going to produce strong performance.

Ryman Hospitality (RHP) shares are not "Tim" cheap by any stretch of the imagination – they are trading at more than 2x book value. The company does own some premier properties, including the Gaylord Properties in Nashville, Florida, Maryland and Texas. The company also has entertainment venues such as Opreyland, The General Jackson Showboat and a golf course. The company also has an AM radio station in its portfolio. The CEO seems to think that increased consumer spending and the growing audience for country music will combine to drive profit and dividend growth as both he and the General Counsel of the Ryman have been buying shares in the past month.

Calamos Asset Management (CLMS) continues to see heavy CEO buying. I do not think the fact that John Calamos is buying shares every month to maintain his level of ownership and offset insider option and stock grants overshadows the fact that he is buying shares of the asset management company. Several directors, the CFO and COO have also been buying stock in the past month. I like this stock and actually hope it declines soon, so I can buy more for the long term.

Insider buying has been shown to be a bullish sign for years. When it is done by a company's top two executives, it is wildly bullish and should be tracked by traders and investors alike.

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