By Numer de Guia If top management doesn't have an insight into a company's future prospects, who does? It's a natural question, and it accounts for why buying and selling of company stock by insiders -- officers, directors, and key employees -- for their own accounts has been attracting increasing attention from investors in recent years.
Why is this important? Well, the level of insider buying or selling may provide clues about management's expectations of how the company will perform in the future. If insiders are buying the stock, it may mean management is bullish about the company's prospects. Conversely, if insiders are doing more selling than buying, it may indicate that they believe the outlook isn't all that great. (Of course, some insider selling may be dictated more by an individual's financial needs than any desire to bail out of the stock.)
STRONG POSITIVES. Standard & Poor's CompuStat, a market-data provider, compiles numbers on insider-stock activity. CompuStat tracks the buying and selling of shares by the top 10 individuals -- based on the number of shares bought or sold -- having an insider relationship with a company, using information gathered from Securities & Exchange documents.
Based on CompuStat data, we looked for companies where the transaction values of insider purchases over the last 12 months exceeded those of insider sales in the same period by a ratio of at least 10 to 1 (transaction values are derived from the number of shares bought or sold multiplied by the prevailing purchase or sale price at the time). A ratio that high may be an indication of strong positive sentiment on the part of company insiders.
The stocks had to pass one final test: Each had to carry a ranking of 4 STARS (accumulate) or 5 STARS (buy) from Standard & Poor's equity analysts. These rankings indicate that analysts expect the stocks to outperform the market over the next 6 to 12 months.
After we ran the numbers, 23 stocks emerged:
Allegheny Energy (AYE)
Charter Communications (CHTR)
Edison International (EIX)
El Paso Energy (EPN)
John Hancock (JHF)
Keithley Instruments (KEI)
Kinder Morgan Energy Partners (KMP)
Liberty Media (L)
Midway Games (MWY)
Phelps Dodge (PD)
Pre-Paid Legal (PPD)
Prudential Financial (PRU)
Sovereign Bancorp (SOV)
Weingarten Realty (WRI) De Guia is a portfolio services analyst for Standard & Poor's