Sometimes, the Insiders will telegraph BIG MOVES to COME by their investing actions….I
can tell you over the years that I have found many big winners by
following the INSIDERS. However, you have to be careful of which insiders to
follow. Allow me to explain…
I tend to favor insiders who are lone wolfs…in
other words, I want one insider who is doing all the buying, rather than
3 or more insiders doing the buying. Why? Because sometimes, a
group of insiders will buy because of “programmed buying” which is to say, the insiders agree to act together for the better good of the company’s stock. Sometimes, there
is an expectation that insiders will use part of their salaries to buy
stock until they build a decent position. I don’t get excited by peer pressure purchases, because it is
often the blind leading the blind…or perhaps the insiders are all
buying to create the illusion that something good is going to happen
while also helping to prop up the price?
But when one lone
insider (or two insiders is okay most of the time for me) does the
buying, that seems to be more indicative of someone who knows good news
is coming and they are willing to use their own money toward buying
shares before the price goes up on the future good news. Whereas most stock analysts and investors can only see forward visibility for about one to three months out, an inside officer of the company can be aware of events coming much further out. Perhaps they know of some new process or acquisition that is going to come in the next year? Or perhaps they can see increasing channel sales that may not show up in the earnings announcements for another quarter or two into the future. Whatever the reason, the inside officers and directors have access to special information that the public can’t often see.
Also, I
prefer to follow large inside purchases….if an insider buys, say $100,000 of
stock, I don’t get too excited as that amount of money is like pocket
change to many insiders….but if a lone wolf insider buys, say $1
million or more of stock, then that is a BIG purchase being made with
one person’s money. Moreover, when an insider buys a large amount of stock with their own money, they are doing it for one reason really…they expect the price of the stock price will go higher based on what they know.
One of the classic insider buys was about 16
years ago by Bernie Ebbers who was CEO and Chairman of a regional
telecom known as WorldCom. I saw that Ebbers had bought $80 million of
WCOM stock with his own money (which I later learned was loaned to him
by WCOM’s board of directors) and this made me very curious why one man
would invest that much money into a rather unknown stock and as I
investigated it, I discovered that WCOM had acquired a burgeoning
internet property from another telecom called MCI… that property was
considered the back-bone of the new internet.
As the Dot-Com
bubble grew, investors caught on to the fact that the very back-bone of
the internet was owned by Worldcom and that Worldcom could come to dominate the internet. I had been wise enough to follow Ebber’s
lead and load up on WCOM stock….about 18 months later, I sold all of
my WCOM with over a 100% gain on the shares! Fortunately, my stock
charting skills spotted the top was not too far away….oh sure, it did
go higher, but not a lot higher before it topped out….
The rest is
history as we came to learn that Ebbers apparently committed fraud at Worldcom …However, that’s a story that goes beyond the scope of this blog. Anyway, WCOM is a classic example of “insider tea leaves” as far as I
am concerned, because charting helped guide the way once I knew where the good news was going to come from with this stock…and charting also helped
me to see when it was time to make an exit before the house of cards
collapsed. Unfortunately for Ebbers and many of Worldcom’s investors, they probably had no clue about how to read a chart and see that WCOM was nearing the end of a great run.
Speaking of large INSIDER Purchases, there are a few new ones lately….
I
am not invested in these two (yet), because I have only begun to study
them, but I learned that both Office Depot (ODP) and Esterline Tech
(ESL) recently had large lone wolf purchases by inside directors.
In
the case of ESL, it’s interesting that the large purchase (over $9
million!) took place after the most recent breakout….most insiders do
their buying when the stock price is depressed, so this seems to point
to something big must be in the works for ESL?
Indeed, the recent
breakout has caused the stock to sky-rocket and I would be afraid to
buy it at the current price as it looks overbought…but a pullback to
the $92 area where the insider bought might be a good entry point, so I
say pay attention to any pullbacks.
As
for Office Depot, I have avoided this sector for years because of the
poor profit margins and over-saturation of office supply stores, but the
recent large purchase (over $7 million!) of ODP stock by one director
(and a sizable purchase by another director in November) seems to point
to something good is coming. As I understand it, there is more
consolidation expected in the office supply space, and if the economy is
improving as some statistics seem to say, then perhaps ODP is about to
become more profitable in the coming year?
At any rate, the ODP
chart reveals a SYMMETRIC TRIANGLE from which major moves often
occur….and those moves often happen when the stock is about 80% of the
way through the triangle, which is precisely where ODP is now. Though
the Symmetric Triangle can break either way (and ODP was down over 2% on
Friday), it should be noted that the triangle is in the bullish
position because this pattern is at a higher level than the previous
major pattern which was a cup-n-handle. In other words, the pattern’s
position relative to a previous pattern is a reflection of the trend,
which has been up for ODP since September.
I am not saying that
either stock is a buy, but do your own research and make your own
decisions. I am showing the ODP chart below for your review. Let’s check back in a few months and even a year from now on both ODP and ESL to see what develops. As always, keep in mind that I am not a Registered Investment Advisor nor a stock broker. Investing in stocks can be quite risky, and cause loss of principal. Past performance is not indicative of future outcomes. Take care….and Happy Holidays!
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