Choosing the right stocks to invest in can be a difficult proposition for even the most sophisticated investor. Today's market participants are faced with an overwhelming amount of information about every public company.
Fortunately, for the rest of us, it doesn't need to be that expensive. In fact, one of the keys to successful stock picking is readily available for free on www.nasdaq.com and several other websites. I'm referring to information on insider trading.
You see, every insider transaction needs to be reported to the SEC on Forms 3 and 4. This means every investor can easily access this crucial information for making investment decisions.
When I find a stock with an appealing technical and fundamental picture, I look at what the insiders are doing and use that information to help me make my decision. If I am bullish and recent insider buying greatly outweighs insider selling, this is a strong confirmation of my bullish bias.
On the other hand, if selling greatly outweighs buying, this could be bearish for the stock -- but not necessarily. Insiders sell stock for any number of reasons: Just like anyone else, insiders have monetary needs for expenses that may be personal and not related to the health of the business. Consequently, I place much more weight on heavy insider buying than I do on insider selling.
Here are two stocks with heavy recent insider buying.
|BJ's Restaurants (Nasdaq: BJRI)|
Launched in 1978 in Orange County, California, BJ's Restaurants makes its own craft beers and sells them at its chain of deep-dish pizzerias, which now numbers 148 restaurants in 17 states. Boasting a market cap of just over $860 million, the company had revenue of $775 million and gross profit of $409 million last year. BJ's has nearly $31 million in cash on hand and operating cash flow of nearly $96 million last year.
However, the company had a disappointing fourth quarter. Although revenue was up from the same quarter the previous year, earnings fell 78% as comparable-store sales slumped 2.7%, and guest traffic dropped 2.3%. Analysts cited aggressive discounting and higher promotional marketing offers. The severe winter across much of the U.S. may have played a role in the traffic decrease.
Fortunately, the company has no debt and is adding locations in an effort to turn its slump around. In addition, several activist investors, including PW Partners and Luxor Capital Partners, have become involved. PW Partners' Patrick Walsh has experience in working with Denny's, Famous Dave's and Red Robin. His first move is to nominate five people to the board of directors. Word of the activists' involvement sent shares soaring from the $25 range to just above $35 before drifting back to the $30 area.
Luxor currently owns 10% of BJ's and purchased close to 457,000 shares at $34.70 on March 19. Patrick Walsh purchased just over 90,000 shares at $34.57 on the same date. Insider sales greatly outnumbered insider buys in the last 12 months, with 43 sales to 15 buys. However, the 890,029 shares purchased by insiders dwarfed the 44,828 shares sold. There is incredible insider support of this company despite its struggling numbers.
|NuStar Holdings (NYSE: NSH)|
The next stock on my heavy insider buying list is NuStar Holdings. NuStar is a publicly traded limited liability company (LLC) that owns a 2% general partnership interest, incentive rights, and a 13% limited partnership interest in NuStar Energy, one of the leading terminal and pipeline operations in the United States. NuStar Holdings also has business in Mexico, the United Kingdom, Turkey and the Netherlands.
I first learned about the investing power of the master limited partnerships (MLPs) from Nathan Slaughter's High-Yield Investing advisory. One of the benefits of MLPs is that they are structured so that the majority of profits are paid out as dividends to shareholders. This fact is reflected in NuStar's dividend yield of 6.4%.
What I find compelling is that 20% of the owners in this stock are insiders. Over the past 12 months, 251,925 shares were purchased by insiders, compared with 15,802 shares sold. NSH is up 7% this year and is exhibiting a steady trend higher.
Risks to Consider: Although insiders possess the most knowledge about a company, they are not always right about the company's prospects. No matter how compelling a stock looks, always use stop-loss orders and diversify when investing.
Action to Take --> I am bullish on both these stocks due to the technical and fundamental pictures combined with the heavy insider buying. NuStar is a buy right now in the $34 range, and I wouldn't be surprised to see it at $40 within the next 52 weeks.
BJ's Restaurants is a little more speculative due to its poor performance recently and the uncertainty around the activist-driven turnaround efforts. Risk-taking investors can buy on a further pullback into the buy zone channel on the chart, with the lower line on the channel used as a stop loss. With that said, I expect to see BJRI trading at $35 or higher within the next year.