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While just one piece of the investing puzzle, insider buying and selling can provide valuable clues when setting up a stocks to watch list.
When looking at individual stocks, there is a general rule of thumb to follow when looking at insider buying and selling. Mutual fund legend Peter Lynch said it best: "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.
Overall, more insider selling than insider buying by corporate officers and directors can be a bearish market indicator. Looking back, a pickup in the pace of insider selling in December was a harbinger of the slump in the markets we've seen so far in 2014.
While the insider selling has slacked off somewhat so far in the New Year, there is still a strong bearish bias to insider activities. According to Barron's, the top 20 incidents of insider selling in recent weeks totaled more than $364 million, while the top 20 incidents of insider buying totaled just $7.5 million.
Cloud-based solutions company Cvent Inc. (NYSE: CVT) saw the most selling recently, with five insiders combining to dispose of more than $90 million worth of stock. Much of this selling was driven by liquidity and diversification issues related to it being an IPO that went public in August.
Meanwhile, the former chief executive officer of VeriFone (NYSE: PAY) disposed of more than $50 million worth of shares over the past few weeks.
Now on to the buyers…
Stocks to Watch: Where Insiders Are Buying in 2014
In most cases, insider buying is a precursor to a higher share price over the next year. 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.
Here are two stocks to watch for a turnaround as insiders load up on shares…
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