Insiders Are Telling You to Buy These Stocks

By Brian Nichols - December 29, 2012 | Tickers: ANF , CYTX , FRAN , ODP | 0 Comments

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Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

Let’s not fool ourselves, an insider knows what’s going to happen before it happens. They have a good grasp on sales, demand, supply, and other operational metrics that are vital to success. Therefore, when an insider purchases shares of his or her company, it might be a sign of what’s to come. Therefore, I am looking at a few top insider buys, along with one major institutional buy, that might be a sign of what’s to come for a particular stock.

Like I said, I am looking at a top institutional buy that I consider “significant,” including a recent purchase by Citadel Advisors. According to a recent filing, the firm purchased more than five million shares of Abercrombie & Fitch (NYSE: ANF ) . The company has had an up-and-down five year period, with very little consistency. However, after a very strong quarter, the stock traded higher by nearly 30% and is looking solid. Therefore, Citadel’s investment is a good sign that better and more consistent days might await this stock.

Much like Abercrombie & Fitch, shares of Francesca’s Holdings (NASDAQ: FRAN ) have been wildly unpredictable over the last 16 months. The specialty retailer has seen very strong growth, and expects it to continue; it is therefore widely held by institutions. In the month of December there have been approximately five insider purchases for a total of 24,233 shares. These purchases are not as significant as those by Citadel, but the fact that it includes five different insiders, and that it was done among concerns regarding slowed growth, is a good sign.

Here’s some insider activity that might be a little enlightening: Over a period of six months Office Depot (NYSE: ODP ) insiders have acquired nearly seven million shares, or 2.94% of the company’s float, according to Kapitall . This has been one of the worst performing, and most shorted, stocks of the last five years. However, along with such strong insider buying, the stock has recovered to post gains of 51% during the last six months. Therefore, investors must ask themselves if this could be a sign of a company turnaround?

Biotechnology investors are always looking for a sign that a developmental company might have a successful clinical trial. Therefore, the fact that Cytori Therapeutics (NASDAQ: CYTX ) investors have purchased 67,000 shares during the month of December should be encouraging. Furthermore, the stock has declined nearly 35% in the month of December but has found support during the last week as the market traded lower. Perhaps the fact that insiders are buying, and that the stock has found a bottom, is a good indication that it’s time to buy?

Conclusion

An insider purchase is by no means a guarantee that a stock will trend higher. Sometimes a company can perform with fundamental perfection but its stock still trades lower, or flat. Such is the case with companies Spectrum Pharmaceuticals and SodaStream ; therefore an insider buy doesn’t mean the stock will rise. However, it might indicate that the company will see strong performance, because after all, these people have inside knowledge of the business and won’t intentionally invest their money into a bad business. As a result, it might be wise to take notice of these purchases and perform further due diligence to determine if any are worthy of your investment.