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This week I'm spending some time testing the theory from a recent paper on how insider buying and selling affects different bearish and bullish factors.
I'm finding that adding insider data to our stable of numbers-driven market strategies really boosts returns, and more importantly, it does so by avoiding potential problems.
While insider buying does magnify gains somewhat overall, where portfolio returns go into the stratosphere is using insider selling to cancel signals that would otherwise be a buy.
This helps us avoid the big mistakes and keeps the focus of the portfolio on those companies where insiders have been buying.
The results from this combination create a portfolio that's a laser-focused rocket ship to big profits...
The Advantage of the Inside Track
One of the most profitable models I use is a private equity replication strategy.
This model finds companies that are leveraged but have a strong credit profile and are using cash flow to pay down debt.
Tracking credit conditions closely forces many companies out of the portfolio the second conditions deteriorate and helps avoid those leveraged companies that turn south and are headed for disaster.
Using the core model, you almost double the market rate of return over the past ten years.
On average, 16 stocks pass the rigorous criteria I use to select companies to include in the portfolio.
Adding an insider buying element to the strategy supercharges the results.
The number of companies that pass all the filters shrinks to just seven, but the condensed list crushes the market rate of return.
If you had used this strategy for the last 20 years, you would have seven times as much money in your account as someone who listened to the experts and bought a low-cost index fund.
Right now, there are only two companies that qualify for the portfolio.
That's not a surprise, given that we are 10 years into a bull market.
Stock prices are flirting with all-time highs, so finding companies that trade at bargain prices is a bit of a challenge.
I don't know that I would be willing to put all my money into two stocks, but both of them should probably be in your current portfolio if you are looking to maximize your returns.
This Company Will Help You Breathe a Little Easier
Innoviva Inc. (NASDAQ: INVA) is a fascinating company.
It is in the pharmaceutical royalty business and has a long-acting beta2 agonist collaboration agreement with GlaxoSmithKline Plc. (NYSE: GSK) to develop and commercialize once-daily products for the treatment of chronic obstructive pulmonary disease (COPD) and asthma.
The company used to be known as Theravance, and some of the reputational hit from the controversy surrounding its former CEO has stayed with the stock.
Even as the market has rallied this year, shares have sold off by almost 30%. However, insiders were buying the stock earlier this year at much higher prices.
The company is trading for less than six times cash flow right now, and total liabilities have been declining, shrinking the current debt-to-equity to 1.46
Wall Street is ignoring the company, as only two analysts currently follow the stock.
Those two lonely analysts are pretty optimistic about the company's prospects.
The estimates for the next five years call for almost 20% annual earnings growth, so there is a lot of upside potential with this stock.
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Building the Framework for Success
Ryerson Holding Corp. (NYSE: RYI) is in the industrial metals business in the United States, Canada, Mexico, and China.
It sells stainless steel, aluminum, carbon steel, and alloy steels, as well as nickel and red metals in various shapes and forms to a wide variety of industries, including commercial ground transportation manufacturing, metal fabrication and machine shops, industrial machinery and equipment manufacturing, consumer durable equipment, HVAC manufacturing, construction equipment manufacturing, food processing and agricultural equipment manufacturing, and oil and gas.
Insiders are pretty excited about the prospect for the company stock price, as several executives, including the CEO, were active buyers of the stock over the summer months.
The company is highly leveraged, with a debt-to-equity ratio of over eight, but the company has a solid credit score, and there are no signs of financial distress.
In the most recent quarter, the company used its cash flow to reduce debt by cash flow from operations by $77.1 million.
Analysts are expecting big things from the company with a five-year average annual earnings growth of more than 20%.
Short-term concerns surround deflation in metal prices, and the ongoing trade situation is keeping valuations depressed. The stock is trading for just six times cash flow.
The multiple should be a lot higher than that, and once trade talks disappear from the news, we could see a sharp increase in the stock price.
I'm just getting started testing the idea of using insider activity to improve the already fantastic performance of our various strategies, and our early results are very promising.
The post Here's How Narrowing the Field Can Expand Your Returns appeared first on Max Wealth.
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 Peak Yield Investor.