Studies show that stocks bought by insiders narrowly outperform the S&P 500 (read our analysis of studies on insider trading). Our explanation for this finding is that insiders already have an economic connection to the company, and so they should prefer to diversify their wealth rather than increase company-specific risk unless they are particularly confident in the stock. To make use of this finding, we track recent insider purchases and like to screen them according to different criteria. For example, we can compare recent insider purchases with quarterly 13F filings (which we track as part of our work developing investment strategies- the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) from investors such as billionaire oilman turned fund manager T. Boone Pickens. Here are five stocks which Pickens reported owning as of the end of March (or see the full list of Pickens’s stock picks) and which have had at least one insider purchase in the last three months:
One of Pickens’s largest holdings by market value was his roughly 125,000 shares of Apache Corporation (NYSE:APA), an independent oil and gas exploration and production company; we’ve tracked multiple insiders buying the stock since late March. Stocks bought by a consensus of insiders are particularly likely- though not certain, of course- to outperform (learn more about consensus insider purchases). While Apache Corporation (NYSE:APA) trades at 18 times trailing earnings, EPS are expected to improve over the next year and a half and as a result the forward P/E is only 9 (though both revenue and earnings have been down recently).
An insider bought 1,000 shares of Occidental Petroleum Corporation (NYSE:OXY) in late May; Pickens’s BP Capital reported a position of close to 80,000 shares in the $74 billion market cap oil major. At 12 times forward earnings estimates, Occidental trades at a small premium to some other large oil and gas companies. That multiple also incorporates expectations of moderate earnings growth, even though net income fell 13% last quarter compared to the first quarter of 2012. D.E. Shaw, a hedge fund managed by billionaire David Shaw, owned 4.6 million shares at the beginning of April (research more stocks D.E. Shaw owned).