Over the years, I have made a wide variety of friends and associates around the world. I try to be open-minded, so I have friends who are Democrats, Republicans, growth investors, short-term traders -- even New York Yankees fans. I even have friends who fancy themselves technical analysts and traders. I do not want to disparage TA, as I know some folks, like Bob Byrne and Tim Collins, have made it work for them quite successfully. I have to say that they are the exception rather than the rule as most of the chartists I have known struggle to make money consistently.
I talked to one such trader the other day, and hearing him talk about the various patterns and crossovers made my eyes glaze over. His search for the perfect entry point ended with a price chart that was so marked up it looked like an early effort by a 10-year old Picasso.
I have a better way to find entry points into stocks: Follow the insiders.
It may not be precise or perfect, but it is very effective. I looked at insider buying in the first quarter of the year for the past several years. Insiders may not have precisely pegged the bottom, but they were pretty good at identifying sectors that would do well over the next year or two.
In 2009 when the world was on sale, insiders were heavy buyers of blue chips like Coca-Cola (KO), American Express (AXP) and Campbell Soup (CPB). I would say that has worked out pretty well since then. The same positive results were experienced by officers and directors who were buying hotels, banks, REITs and homebuilders in 2010.
In 2011, it was banks once again, and we started to see buying by insiders at consumer-related companies. Early 2012 saw strong buying interest in casual dining stocks like Wendy's (WEN) and Cracker Barrel (CBRL), as well as small banks and energy stocks. The last two years have seen the early insider activity dominated by REITs, small banks, and business development companies. Following the insiders seems to work a lot better than trying to interpret complex chart patterns in search of divine guidance from the market gods.
It should come as no surprise that buying in recent weeks has seen a lot of energy sector officers and directors buying shares of the companies they run. With oil in a free-fall, many of these stocks are getting cheap, and insiders with a long-term view are starting to buy shares of their companies. In the last six weeks we have seen multiple buys at WPX Energy (WPX), Tidewater (TDW) and Comstock Resources (CRK). I doubt that the insiders have pegged the exact low in oil prices, but I suspect the stock prices will be a lot higher for many of them at this time next year.
The consensus view seems to be that business development companies will struggle next year. We have already seen some dividend cuts in the sector as portfolio managers de-risk and reposition their portfolios. The insiders seem confident they will survive and thrive in 2015, as BDC's such as Prospect Capital (PSEC), Compass Diversified Holdings (CODI), Medley Capital (MCC) and New Mountain Finance (NMFC) have seen insider buying in recent weeks. Income investors should consider following the insiders in these high-yielding alternative income investments with a portion of their portfolio.
Real Estate-related names are seeing insider support as we start 2015. American Homes 4Rent (AMH), BRT Real Estate (BRT), Mid-America Apartments (MAA), Alico (ALCO) and City Office REIT (CIO) have seen buying to kick off the year.
The sector showing the most positive insider activity is not a surprise to me at all. The officers and directors overseeing U.S. community banks in are consistent and enthusiastic buyers of the banks they manage. Since the Dec. 1, there have been insider buys at 50 small banks. The list is too long, and many are too small to mention here, but notable buys include Naugatuck Valley Financial (NVSL), Pacific Mercantile Bancorp (PMBC), Waterstone Financial (WSBF) and Coastway Bancorp (CWAY). The Trade of the Decade in small banks continues to be my dominant focus for 2015 and the insiders are all aboard at many of these banks.
Reviewing where insiders were buying in the past six years leads me to a solid conclusion: You can keep your charts. I will track insider buying to find decent entry points for stocks and sectors.