Wise investors covet insider stocks to buy because they realize something very important.
It's something mutual fund legend Peter Lynch once described very succinctly: "There are many reasons why insiders sell, but only one reason insiders buy." That reason being, of course, that insiders know something about their company that they are certain will drive the stock price higher.
And research bears this out.
According to Nejat Seyhun, a professor and researcher in the field of insider trading at the University of Michigan, whenever you have insider buying, the stock tends to outperform the total market by 8.9% over the next 12 months.
When you have an indicator that consistent and that profitable, it's crazy not to take advantage of it.
Insider Stocks to Buy: LAYN, CLMS, OPK
So far in 2014 we have seen some interesting activity by corporate insiders. Early on, the sellers have the edge, but there has been no cluster insider selling.
That makes the significant insider buying by officers and directors even more interesting, however.
Just take a look at these three insider stocks to buy now:
Insider Stock to Buy No. 1: Layne Christensen Co. (Nasdaq: LAYN): Layne is a water management, construction, and drilling service business in North America. The company's customer base includes government agencies, utilities, industrial and mining companies, engineering firms, heavy civil construction contractors, oil and gas companies, power companies, and agribusiness.
Chairman of the Board David Brown spent more than $330,000 to pick up an additional 20,000 shares in the first week of the year.
The move raises eyebrows because LAYN has been hit hard in the past year. Shares have fallen by more than 20% over the past year, and the company has fallen short of Wall Street estimates four quarters in a row. Brown apparently sees a rebound ahead.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of "Max Wealth" and Heatseekers.