Following the Inside Track

This screen finds positive trading trends by company insiders, then weeds out the names with weak fundamentals

By Michael Kaye, CFA

Many investors avidly track the buying and selling of company stock by insiders -- officers, directors, and key employees -- for their own accounts. It makes a certain amount of sense. After all, who would be in a better position to judge a company's future prospects than its top brass?

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.)

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.


  Using 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.

Then to make sure that the stocks on the list had good potential for future capital appreciation, we used one final filter. Each stock had to carry a ranking of 4 STARS (accumulate) or 5 STARS (strong buy) from Standard & Poor's equity analysts. These rankings indicate that analysts expect the stocks to outperform the market over the next six to 12 months.

These seven stocks emerged:

The inside track on future gains?
Company/ticker S&P STARS Rank
Apache (APA ) 5
Enzon Pharmaceutical (ENZN ) 4
First Data (FDC ) 4
Sabre Holdings (TSG ) 4
Sara Lee (SLE ) 4
Wendy's International (WEN ) 4

Kaye is a portfolio services analyst for Standard & Poor's

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