A
Terrific Opportunity in a Mammoth Sector... and the Profit
Window is Open Now
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By: Karim Rahemtulla
Investment Director
Smart Profits Report
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Published:
April 21, 2008
Pop quiz: Over the
past six months, one sector of the market has seen more insider
buying than any other. Can you name it?
If you think it's technology, you'd be wrong. Yes, the sector
has enjoyed a resurgence in recent months, but not enough to
whip up a heavy enough wave of insider buying as the sector I'm
talking about.
Healthcare? It's an excellent investment area during tough
economic times due to the essential nature of drugs and
medicine that produces plenty of repeat business. But that's not
it either.
No... the answer is the financial sector. Large insider
purchases have occurred at some of the following companies:
Wells Fargo (NYSE: WFC)*,
Bank of America (NYSE: BAC)*,
Wachovia Bank (NYSE: WB),
Fifth Third bank (Nasdaq: FITB),
American Express (NYSE: AXP),
Genworth Financial (NYSE: GNW) and
Colonial National Bank (NYSE: CNB). I've specifically marked the companies
that Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) has been
buying recently with an asterisk.
But for all the strong insider buying, financial shares have
endured a beating.
What gives? Insider buying is one of the best market indicators.
Always has been. But could all these insiders be wrong? And if
they are, the question is: if the guys running these companies
can be so wrong, what chance do ordinary investors have? After
all, these are the people involved in the day-to-day operations
and privy to details that will never be public. Are they just
plain stupid? Let's find out...
Short Versus Long
In the investment world, there are two types of investors:
Short-term: These guys look to be in and out of a stock in a
matter of weeks, sometimes days. They're looking for trading
opportunities, not necessarily value.
Long-term: These investors look past the daily market noise and
hype, focusing instead on the next 12-18 months for a return on
their capital.
Insiders definitely tend to have a longer-term outlook. Insider
buying is historically a very early indicator. For example,
insiders cannot buy shares on Monday, knowing there will be good
news on Friday, because they can't trade on material
information.
Instead, they buy shares on anticipation and optimism that their
company is poised for future success. In addition, insiders
can't sell shares for a good length of time after buying them.
So when it comes to the current financial sector pain, the
insiders who bought shares in their own companies are suffering
just like regular investors.
However, here's why you should pay attention to these trends...
Putting Their Money Where Their Mouths Are
More often than not, insider buying is a very accurate indicator
-- especially when a certain company's insiders buy shares in a
cluster pattern. They're right more often than they're wrong --
and usually by a very wide margin.
You have to remember that insiders buy thousands of shares with
several thousand, sometimes millions, of their own dollars. It's
not just a few hundred bucks here and there.
Ask yourself why anyone would bet the farm like this just to
lose it. It may happen occasionally, but rarely when insiders
buy with such gusto and such size. Such heavy buying usually
signals some serious optimism.
And with the financial sector, there's another factor at work...
A Unique Opportunity In A Mammoth Sector
In terms of financial sector shares, many insiders realize that
that the current battering gives them a unique opportunity: to
buy high quality stocks at very discounted levels.
This is a real "kitchen sink period" for financials -- companies
want to announce all their ugly losses to the market at once and
get the pain over with quickly.
Financial stocks with heavy insider buying look extremely
attractive now. They may look even more attractive next week.
But I'd say that a year from now, they will look much less
attractive from an investing standpoint.
So what's the best way to follow the insiders?
The All-Important "Insider Window"
The key to following insider trades is timing.
If you're looking to hop on the bandwagon with these astute
folks (and remember, they know more about their companies than
anyone else), you want to buy after the insiders buy.
That means you want to buy in a 3-6 month window after the
insider buying has taken place. Why? Because insider buying as a
forward-looking indicator is usually not confirmed by the market
for a period of at least 6-9 months in the future.
You must be patient. Don't fall into the trap that many ordinary
investors do -- that is, they do all the hard work by following
the trends and buying shares, but then get antsy and sell at a
loss within that 6-9 month period because "nothing" happened.
They then watch as the shares begin to move up in "miraculous"
fashion.
But it's not a miracle at all. It was the insider buying
indicator working in time-tested fashion: buy shares when
they're cheap and hold them until they are expensive.
Believe me, insiders also have an uncanny knack for selling at
(or near) the top. Right now, they're not selling in the
financial sector; they're buying like there is no tomorrow.
We'll check back at the end of the year to see if their strategy
has worked or not, but you could do a lot worse than buying some
financial sector shares now.
Talk to you again soon.
Karim
* * * * * * *
Today's Notes
Whose words matter most? The analysts? Portfolio managers? The
yap-happy hosts on CNBC? Or the actions of insiders? When it
comes to filtering out the facts from the fiction with a certain
company, the executives and directors easily have the most
accurate, up-to-date information on their company's orders,
supply and demand, and overall prospects. And it's not so much
what they say, but what they do. And don't be fooled by insider
selling activity. It doesn't necessarily indicate pessimism or
imminent doom. Often, sales are planned once the stock hits a
certain level, or an executive wants extra funds in order to
diversify, or pay for personal items. While insider activity is
not a guarantee of future performance (nothing is), the trends
can provide excellent clues.
Fundamental and technical analysis is crucial... but so too are
other powerful indicators like insider buying trends. While not
reflective of a company's balance sheet strength or a stock
chart's potential breakout move, insiders can lead you to
profits just as effectively. Karim has used heavy insider buying
trends to buy two of the financial sector's biggest companies in
the Xcelerated Profits Report newsletter -- and the May issue is
set to go to press imminently. This month, we're buying a
company seeing plenty of "activist" interest (some of Wall
Street's biggest players are involved with this one)... making
some strong progress in a $14.6 billion global market... and
could be subject of a Big Pharma buyout.
Find out how you can
get involved too by clicking this link, plus get a whole year
of stock recommendations from our team of pro traders.
About Karim Rahemtulla
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