Taking a Tip from Insiders

S&P's new screen looks for strong stocks with positive momentum -- and favorable insider-buying trends

By Michael Kaye, CFA

Standard & Poor's offers a menu of analytical tools to assess stocks, covering a variety of investment approaches. A primary focus of this column is to combine those tools to uncover investment ideas for readers. Sometimes our approach is fairly straightforward: e.g., finding stocks with low price-to-earnings ratios that also feature high projected earnings growth rates. But along with the meat-and-potatoes metrics, we sometimes like to employ some less traditional criteria.

This week's screen features three such measures. First, we looked at relative strength, a measure of a stock's momentum. We searched for companies whose price performance earned them an S&P 13-week relative-strength ranking of 95 or greater, placing them in the top 5% of all stocks in the S&P universe.

Next, we selected a tool from the technical-analysis column. The stocks we were looking for also had to have a ranking of 3, or bullish, under another proprietary S&P metric that indicates whether technical analysis signals a bearish, neutral, or bullish outlook on the stock.

SENTIMENT SEARCH.

  Then, to gain a perspective on the stocks' future prospects, we set up another filter: Companies with favorable insider buying. Many investors avidly track the buying and selling of company stock by insiders -- officers, directors, and key employees -- based on the notion that upper management is in a prime position to judge a company's future prospects.

Using information gathered from Securities & Exchange Commission documents, market-data provider CompuStat tracks the buying and selling of shares by the top 10 individuals -- based on the number of shares traded -- having an insider relationship with a company.

Taking CompuStat's data, we screened for companies where the transaction values of insider purchases over the last six 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.

When we finished our screen, these nine names emerged:

 SOLID MOMENTUM, TECHNICAL SIGNALS, INSIDER BUYING
Company Ticker
Aspect Medical Systems ASPM
Celgene CELG
EDGAR Online EDGR
Flow International FLOW
HCA Inc. HCA
MC Shipping MCX
McDermott International MDR
Mobility Electronics MOBE
Retail Ventures RVI

Kaye is a analyst for Standard & Poor's Portfolio Advisors

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