To find stocks that outperform, it pays to follow the insiders.
Company insiders – the executives and directors who know their companies better than anyone else – regularly give us valuable signals on their stocks through their buying. They have to file public forms that reveal when they buy and sell their company stock, so it is fairly easy to track their activity.
However, it is important to follow three basic rules when following insider activity.
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3 Basic Rules for Following Insider Activity
1. Ignore Insider Selling
Insider selling is rarely a great signal, since insiders can sell for any number of reasons that have little to do with their company outlooks. Maybe they need to raise cash to pay for a child’s education, for example. I can’t tell you the number of times I have seen traders on X short stocks like Nvidia (NVDA) or Microsoft (MSFT) citing large insider selling, only to get steamrolled, even though I warn them that insider selling is meaningless as a signal, particularly in technology.
2. Watch Insider Buying Clusters
Insider buying can offer great insights into where stocks are headed next – especially when the insider buying signal is enhanced by certain patterns. For example, I like to look for cluster buys by several insiders at once.
3. Pay Attention to Size
It also pays to follow what I call “size buys” worth $500,000 or more.
After I identify enhanced signals like these (and several others), the next step is to drill down on company and sector trends to see if it makes sense to follow the insider.
Here is a great example of a recent size buy signal:
ConocoPhillips (COP): Recent price: $93; Dividend yield: 3.3%
The energy giant ConocoPhillips looks like a great position to own for investors who want a reliable, decent-sized dividend that is about as safe as they get, with the potential for capital appreciation.
Two reasons: ConocoPhillips has a nice, low-cost asset base, and it has a capital discipline plan in place that protects the dividend, assuming the board and management do not change direction, of course.
ConocoPhillips astutely purchased energy assets in the Permian with the acquisition of Concho Resources and Shell’s Permian shale assets. That gives it a low-cost asset base. The company is cash flow breakeven at $35 a barrel. It can produce a 10% return on production at under $40 a barrel. The low-cost base and financial strength protect the dividend in any down cycle. The low-cost base also means decent profit growth in any energy price upcycle.
ConocoPhillips has laid out a 10-year roadmap calling for steady growth, a conservative investment strategy, and the return of cash to shareholders. The plan commits the company to maintain capital spending at current levels and return at least 30% of operating cash flow to shareholders through dividends and buybacks.
Beyond the Permian, the company holds assets in the Bakken, Eagle Ford, Alaska, and Canada. ConocoPhillips also participates in two Qatar LNG projects.
The Insider Buying
A director in June put a sizeable $500,000 into the stock at $94.24. You may have to pay a little more for the stock, but that is OK because insiders rarely buy for smallish, short-term moves. Energy prices no longer hold much of a geopolitical risk premium. That will change if Middle East tensions heat up. This name serves as a hedge against market declines in that scenario.
If you’re interested in learning more about the insider buying signals I watch, keep an eye on the pages of the Cabot Wealth Daily or subscribe using the sign-up box below.
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