One of the most powerful positive indicators of stocks to buy is insider buying by officers and directors of a publicly traded corporation.
There is often a good reason why an insider buys stock in the company he works for and it is the same reason you and I buy a stock: He or she thinks it is going to go higher in the months and years ahead.
The big difference is that insiders know more about the direction and finances of the company and are in a better position to make an informed decision. Both research and practice shows that following the insiders often leads to excess profits.
Following insiders when deciding on stocks to buy has been a reliable approach to selecting investments over the years.
It's important to keep in mind that insiders are investors not traders. They are buying shares with a view towards the long-term outlook of the company and hoping to earn several multiples of their purchase prices over time. They are also frequently early and tend to buy more as the stock declines if their conviction is high.
They know more than we do about new product offerings, business conditions and prospects at their company and when they open up their wallet to buy stocks in the open market investors would be wise to pay attention and consider joining them.
Here are three stocks to buy if you want to bet on insiders moving toward profits.
Stocks to Buy that Insiders Love Right Now
One stock that has seen intense insider buying of late is Walter Energy Inc. (NYSE: WLT). The company primarily provides metallurgical coal for the steel industry, but also sells thermal coal and related products.
Business if far from robust for the company. For coal demand to pick up there needs to be an economic company of sufficient strength to revive the steel industry. Most economists do not see that happening prior to 2014 at the earliest.
Management has been focusing on closing marginal mines and controlling expenditures and capital expenditures. Those making the decisions have a lot of faith in what's ahead as 10 officers and directors have made open market purchases of the shares in recent weeks. Both of the top executives, CEO Walter Scheller and CFO William Harvey, have been buyers of the stock in May.
In a more robust economy the company could see its earnings and stock price grow at a rapid rate. Not long ago this stock sold for seven times the current quotation and insiders apparently believe the shares can recover a good portion of that lost capitalization.
Now to the oil and gas industry...
Key Energy Services Inc. (NYSE: KEG) is an oil and gas drilling services business that's been struggling. The company services maintenance, work over and capping services to the oil and gas industry and with natural gas in abundant supply, activity in their sector has been weak.
The stock has sold off sharply after falling well short of Wall Street's expectations for revenue and earnings. Corporate insiders are taking a longer view of Key Energy's prospects and they were buying a good deal of the shares that panicked investors were selling in the past month.
Five different executives have opened their checkbooks in the past month to make open market purchases of the stocks. The biggest buyer this month has been CEO Richard Alario who spent almost $300,000 to buy an additional 50,000 shares. This stock sold for over $20 a share in 2011 and the people running the company seem to think it can head back close to that level in the future.
As the controversy over splitting the Chairman and CEO roles at JPMorgan Chase & Co. (NYSE: JPM) at least one board member expressed strong confidence in the future of the investment and banking firm. One of the largest insider buys of the past month was Director James Crown's $14.3 million purchase of shares. That is on top of the $20 million investment he made back in April.
The bank is quickly putting credit problems behind it, and it is estimated JPM will be able to release over $500 million of credit card related loan loss reserves in 2013.
It has been buying back stock under a $6 billion buyback plan and recently received regulatory approval to raise the dividend. Clearly Mr. Crown has a high degree of confidence in the future of the bank and its share price and has backed his convictions with cash.