Public company insiders generally buy stocks for the same reason we all do: They think they have a fair chance of generating a profit on their investment money. This is why companies with recent (insider) buying activity tend to get attention from analysts. Insiders tend to know their companies well. And if they believe that good things are about to happen in the stock, they are probably on to something.
IN PICTURES: Seven Ways To Position Yourself For Recovery
I recently ran a screen for high-profile companies with recent direct or indirect insider buying. I came up with several big names including: E*Trade (Nasdaq: ETFC), the one-time soaring brokerage firm that is currently trading under $2; Fossil (Nasdaq:FOSL), the accessory and watch company; Harley Davidson (NYSE:HOG), the company known around the world for its beautiful motorcycles; Starbucks (Nasdaq:SBUX), known for its gourmet coffees and snacks; and Whole Foods Market (NASDAQ:WFMI), the organic supermarket that is trading near its 52-week high. These companies all provide a starting point for further research. But let's take a look at just one: Starbucks.
Bucking the Trend
The stock is actually off its lows, but is still well below the levels it was trading at several years back when the economy was in better shape and individuals were more able or willing to spend money on a higher-end cup of coffee and snack.
But there are some positive things going on as well. For one, Starbucks has been active in its efforts and attempts to drive traffic/repeat traffic. For example, it has run deals where morning customers who bring back their receipts can obtain a drink at a lower price later in the day. And the company hasn't been disappointing on the earnings front either. In fact, it appears that it has beaten estimates for two quarters straight. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)
Interestingly, the stock is trading near its 52-week high, which I think could end up being a plus too. This is because many investors of all types sometimes like to become involved in companies and equities that have been doing well. Because of the attention it has been getting, it seems that a new high could be just around the corner.
As far as insider activity goes, a quick look at the data shows that two directors purchased stock in the August/September time frame. Together, they bought more than 14,000 shares at prices north of $18. The fact that those insiders were apparently buying somewhat near the 52-week high is a good sign of confidence.
Bottom Line
Stocks with insider buying don't provide a guarantee of high returns. However, insider buying does represent a vote of confidence in a company from someone who knows it well. I like Starbucks because of its recent better-than-expected earnings results; the insider buying is the icing on the cake. I do think that there could be some upside in the share price.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
