Momentum and an Inside Track

This week's screen looks for companies with strong stock-price performance and favorable insider-buying trends. Picks include Encore Wire and TLC Vision

By Michael Kaye, CFA

An old stock market saw warns investors: "Trees don't grow to the sky." But a momentum investor would point out that while that may be true, they can get pretty tall once they begin a growth spurt. Momentum players buy stocks that have been strong recently, in the belief that the factors pushing a stock upward will continue to propel it.

That's the starting point for this week's screen. We began with the list of companies with a market capitalization over $250 million. We then looked for companies on a roll -- those whose price performance ranked in the top 10% of all stocks in the S&P universe over the past 13 weeks.

Of course, momentum investing is backward-looking. 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 -- for their own accounts. That belief is based on the notion that upper management is in a prime position to judge a company's future prospects.


  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.

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 running the numbers, a dozen names turned up:

Favorable Momentum and Insider Buying
Aetna (AET )
ARIAD Pharmaceuticals (ARIA )
Conceptus (CPTS )
Cytyc (CYTC )
D.R. Horton (DHI )
Encore Wire (WIRE )
Landstar System (LSTR )
Midway Games (MWY )
Noven Pharmaceuticals (NOVN ) (OSTK )
Serologicals (SERO )
TLC Vision (TLCV )

Kaye is an analyst for Standard & Poor's Portfolio Services

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