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.


  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:

Company Ticker
Aspect Medical Systems ASPM
Celgene CELG
Flow International FLOW
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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