Following the Smart Money

What do company insiders and big institutional players know that the ordinary investor doesn't? Plenty

Many investors interpret a strong level of buying of a company's stock by insiders -- directors, officers, or other key employees -- as a bullish sign. After all, the reasoning goes, insiders have a front-row seat from which to view an outfit's prospects -- and whether the shares are attractively valued. (Of course, the notion also applies to insider selling on the flip side, but that's a subject for another story.)

As for big institutional players like mutual funds, well, these guys are pros. Their traders are supposed to have access to high-level fundamental and technical research to help them make their buying decisions. That's why many investors like to track the degree to which a company's shares are owned by institutions.

For this week's screen, we decided to find stocks with positive signals on both fronts. We searched for issues where both the percentage of total shares outstanding owned by institutions (last quarter vs. the prior quarter) and insider shares purchased (net of insider sales) are in the highest 20% of stocks in the entire U.S. equity universe.

And while it's nice to think that these shares are highly regarded by bigwigs inside and outside the company, we wanted to confirm their attractiveness in another way. For our next filter, we looked for those shares ranked 4 STARS (buy) or 5 STARS (strong buy) by Standard & Poor's equity analysts. Stocks with those designations are expected to outperform the overall market in the next 12 months.

When we finished our search, these seven names turned up:

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