Insider trading has long been considered by many to be an important indicator of a company's expected performance. After all, if a company officer is willing to put his money on the line, he must be expecting to profit from the trade, the theory goes. It is also claimed that buying activity is usually more relevant than selling (there are many reasons as to why a CEO, for example, might want to sell some of his stock, but nearly the only reason for him to buy shares of the company is because he expects it to make money). There have been some instances, however, that tracking insider trades and acting on them (by buying when the officer is buying, or viceversa) has backfired, which is why it is always essential to do due diligence and not base a buy or sell decision on insider activity alone.
The following three stocks have had recent, significant insider buying: Satellite-radio provider Sirius XM Radio Inc (NASDAQ:SIRI), real estate investment and financial company Newcastle Investment Corp (NYSE:NCT), and hospital operator Health Management Associates, Inc. (NYSE:HMA).
My take: The recent insider buying might signal a positive earnings surprise come Feb. 2, but the relatively low potential upside, coupled with the lack of dividend and uncertain future, make me think twice before following the insiders and pulling the trigger on this one.
2. Newcastle Investment Corp (NYSE:NCT): On Jan 11, both Director Wesley Edens and Secretary Randal Nardone bought 106,950 shares. Each. That's a purchase of almost $1 million worth of shares, or a total of almost $2 million combined. Would it be wise to follow these gentlmen's footsteps?