C-Suite Sweet Spot: Insider Buying by CEO and CFO Is Worth Tracking

 | Sep 07, 2016 | 2:00 PM EDT
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Before we move away from the subject of insider buying I want to check on one of my favorite insider screens. I have done a lot of testing of insider buying, and the best signal of future gain is significant insider buying by one, or both, of the top two executives. When the CEO or CFO of a company opens his or her checkbook and spends $50,000 or more on open-market purchases of shares of the company they manage, good things tend to happen to the stock price over time. When I tested this a couple of years ago, this approach worked regardless of market conditions. Even stock purchased in 2007 and early 2008, before the world exploded, showed decent returns.

I have not done a strict empirical review of this approach in some time, but this morning I did an anecdotal drive-by of the past few years of Real Money articles on this topic, and the results are impressive. Following the top two executives has produced some strong returns, and it appears most of the shares have gone higher since the top two made their purchases. I decided it was worth reviewing again this morning to see which, if any, stocks had seen "top two" buying recently.

Medley Capital  (MCC) is a business development company that saw intense selling earlier this year when it had to reduce the dividend payout. The shares have since recovered, and CEO Brooke Taub apparently thinks they have further to go. Taub purchased more than $3 million worth of stock in August in the open market. Medley is currently trading at 77% of net asset value and yielding a little over 11%.

Shares of Babcock & Wilcox Enterprises  (BW) took a big tumble earlier this summer when it announced a restructuring of its power business due to weakness in the coal industry and that results would be lower than expected. The energy and environmental technologies and services company is struggling to keep its coal-related businesses profitable as it focuses on growing its alternative energy and energy technology business lines.

The top two executives seem to think they can pull it off. Both the CEO and CFO of the company made large purchases in the past month. CFO Jenny Apker wrote a check for $198,000 to buy shares of Babcock & Wilcox, while CEO E. James Ferland spent $648,000 to add to his BW stake. The move into alternative energy in particular could eventually pay huge dividends, and those who buy along with the top two at this price could see substantial long-term gains.

I am not a big fan of exchange-traded funds, but that puts me firmly in the minority. Still, there are more than $2 trillion in assets invested in ETFs, and I really don't think the move from mutual funds to ETFs is anywhere near ending. In fact, it is probably still in the very early stages.

WisdomTree Investments (WETF) currently has about $40 billion under management, and CEO Jonathan Steinberg clearly believes the company can grow its share of this growing market. He recently spent $2.5 million to increase his stake in the company. If WisdomTree can just match the growth of the ETF industry over the next decade he should end up doing very well on shares he bought at about $10.

America First Multifamily Investors  (ATAX) is one of the more interesting companies that saw recent insider buying by top executives. The firm buys and trades in mortgage bonds that finance portfolios of mortgage-revenue bonds issued to provide construction and permanent financing for affordable multifamily, student housing, senior-citizen residential properties and commercial properties.

The income from these affordable-housing mortgages are tax exempt, and investors enjoy a tax-favored yield of over 6% (at the current price). The need for affordable housing the U.S. is enormous, and there could be growth opportunities for those who finance these projects. CEO Chad Daffer appears to think so as he just spent $148,000 to buy shares of the fund.

Following top executives has paid off pretty well for patient investors, and I suspect it will continue to do so. The CEO and CFO of a company know more about the plans, prospects and financial conditions at the company they run than anyone else. When they make an open-market purchase of their own company's shares, it is worth further investigation.

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