Our database shows that insiders have recently going crazy about stocks ranging from natural gas producer Chesapeake Energy Corporation (NYSE:CHK) to security systems company ADT Corp (NYSE:ADT). According to economic theory, it is rational for investors to diversify their wealth; one implication of this theory is that company insiders should avoid buying stock and therefore increasing their company-specific risk. An exception to this rule would occur if the insider is particularly confident in the stock’s prospects, so insider purchases should be more likely to occur under that condition; in fact, studies generally show a small outperformance effect for insider purchases (read our analysis of studies on insider trading). Therefore we think that it can be a good idea to track what insiders are up to and see if any of their buys make for good stock picks. Read on for our quick take on five stocks insiders have bought recently.
An insider bought 8,000 shares of Chesapeake Energy Corporation (NYSE:CHK) between August 5th and 6th. After struggling with liquidity issues and a poor natural gas market last year, the exploration and production company has sold off some of its assets and Wall Street analysts expect enough improvement on the bottom line next year that the forward P/E is 12. Chesapeake Energy Corporation (NYSE:CHK) may be depending on higher natural gas prices for that to happen, however, and 12% of the float is held short as many market players are bearish.
In addition to insider purchases, we also track quarterly 13F filings from hundreds of hedge funds and other notable investors. We’ve found that the information in 13Fs can be useful in developing investment strategies; for example, the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). Our own portfolio based on this strategy outperformed the S&P 500 by 33 percentage points since inception 11 months ago. We can also track interest in individual stocks through this database, and can see that billionaire Carl Icahn (who had bought a stake in Chesapeake Energy Corporation (NYSE:CHK) last year) owned almost 60 million shares at the end of March (see Icahn’s stock picks).
As we’d mentioned, ADT Corp (NYSE:ADT) has also been a target of recent insider purchases. The company was spun out in order to be a pure-play home and business security and monitoring company; many investors like to invest in spinout situations on the theory that management becomes more able to focus on operations without having to consider the needs of the parent company. Read more about investing in spinouts. The stock started off strong after becoming publicly traded last October but has since declined to the point that it has underperformed the S&P 500. ADT Corp (NYSE:ADT) is valued at 20 times forward earnings estimates.