A Year-End Guide to Insider Buying

 | Dec 31, 2013 | 2:00 PM EST
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I have done a lot of studying and testing of insider buying and its predictive nature regarding future stock movement. I have found that when insiders buy, the stock usually goes higher, with 60% of issues moving higher in the 12 months after an open-market buy. When you restrict insider activity to just the top two executives, the numbers improve dramatically. When CEOs or CFOs open their checkbooks and spend at least $50,000 to buy stock in their company, shares run 70% of the time and move substantially higher over the next year.

As we close the books on 2013, I thought it would be instructive to see where the top two executives have been buying in the last few weeks of the year.

If insiders are any indication, this could be the year of the rebound in mortgage real estate investment trusts. These leveraged, high-income vehicles have been hit hard this year as rising rates hurt the asset value of their portfolios and caused many to cut the dividend to protect the value of the shares. Many REITs have reworked the portfolios to deal with the Fed taper and the prospect of higher rates, so we could see shares rebound as spreads widen and increased cash flow. That appears to be the thought process at M-REITs like Invesco Mortgage (IVR) and Annaly Capital (NLY) as both have seen strong insider buying with both CEOs participating in the purchasing binge.

Brokerage and research boutique JMP Group's (JMP) CEO Joseph Jolson has been one of the largest year-end buyers, spending more than $1.3 million on shares. The investment banking and asset management firm specializes in technology, healthcare, financial services and real estate and should see substantial IPO and M&A activity in the year ahead. JMP is seeing strong earnings growth and the stock appears to have significant upside over the next few years. The CEO certainly thinks so.

Old friend Tronox (TROX) has seen its top executives buy up shares. CEO Thomas Casey just bought 20,000 shares in the open market for $424,000. It was the second time he has picked up shares this year; he bought 20,000 shares in June. If the economy and real estate markets continue to firm, demand for its titanium dioxide products will continue to improve next year. The stock is certainly cheap at the current level, trading at just 1.1x book value and yields more than 4%.

The top bosses at many business-development companies (BDCs) feel like 2014 is going to be a great year and they are loading up on shares of their own stock to take advantage. There is still a huge financing void for mid-market companies, and these firms are able to fill the gap by providing financing and equity to these companies. They are usually very high-yielding investment vehicles as the bulk of their investment income is paid in the form of dividends. Top executives at Fifth Street Finance (FSC), Monroe Capital (MRCC), Gladstone Investment (GAIN) and Gladstone Commercial (GOOD) have been large buyers of stock in the BDCs they operate. All offer dividend yields of more than 8%, so income investors might want to do further investigation and consider investing alongside these executives.

Kratos Defense and Security Systems (KTOS) had a pretty good year with its stock price rising by more than 50%. CEO Eric DeMarco and CFO Deanna Lund have both been buyers of the stock in the past month. Although many defense companies face government spending cuts, Kratos is very active in drone programs as well as cyber security and warfare programs and it is less likely to feel the pain of cuts. It also has large programs for homeland security and public safety that will be fully funded for some time to come. It has a great defense industry niche and should see strong sales and earnings growth in the years ahead.

The top two executives of a company know more about its finances and prospects than anyone else, so when they open their checkbook and buy stock in the open market, investors should pay very close attention.



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