Your guide to insiders' stock moves

By Michael Brush

In the great debate between bulls and bears, corporate insiders are voting with the bulls.

They've stepped up buying on the recent market pullbacks. This is a new shift; see the column I wrote in August titled "Why are company insiders selling?" And it's at least a short-term bullish signal, according to Michael Painchaud at Market Profile Theorems.

In an uncertain economy, this buying can point us to stocks with great potential. Model portfolios I've created based on insider buying have outperformed the market nicely for the past several months. After all, who knows better how a company is doing?

Unfortunately for investors, many sites offering sophisticated insider analysis are expensive. The good news is that armed with a little know-how, you can come close to matching their analyses for free.

Here's my guide on how to find stocks to buy by watching corporate insiders' moves.

The big picture

Mind you, I'm not talking about illegal insider trading. I'm simply talking about the buys and sells of company stock that insiders have to report to the Securities and Exchange Commission.

First you need a free Web site that helps you collect the data. My favorite is Insider Monitor. This site displays buys and sells by corporate insiders shortly after they are made public, via the SEC site.

To use Insider Monitor, begin by opening up purchases for a recent day. Then click on the "value" tab at the top. This sorts insider purchases by the dollar amount purchased.

Then start at the top of the list and work your way down, looking for buy signals.

To check the insider history at specific companies -- a key aspect to all this -- go to the "insider trading" area of MSN Money. Then type in a ticker and view "all transactions." This displays the recent history of buying and selling at the company, which will help you determine whether a recent insider purchase is really a solid buy signal or just a head fake.

Here are six rules I use to examine insider buys.

Rule 1: Follow the mega-purchase

The simplest insider buy to follow is the mega-purchase -- $500,000 or more.

Some analysts argue that such purchases don't matter much because they're made by the rich, for whom a half-million-dollar bet might not mean that much. Hogwash. Successful people got that way because they are extremely competitive and hate to lose.

In following mega-buys, you'll be in big companies that are household names. This makes them easier to research, and it might make you more comfortable owning them.

Media magnate Barry Diller recently placed the biggest mega-bet I've seen in a long time. In late October, he bought $27.5 million worth of Coca-Cola (KO, news, msgs) at about $54 a share. Diller is a Coke insider because he's on the board. Coca-Cola has a huge international distribution network, which gives it a leg up in the battle against PepsiCo (PEP, news, msgs) and others in emerging markets.

Video: Insider buying at Coca-Cola, Bank of America

Next, Bank of America (BAC, news, msgs) director Robert Scully bought $1 million worth of the bank's stock at $16.80 a share in October. A check of the history shows another insider made a million-dollar bet on this bank at about $16 a share in August. Seeing more than one inside buy is always good.

Bank of America might be in trouble because of the credit mess, but these insiders seem to be saying it will win again when the dust settles.

Rule 2: Follow the Energizer Bunny insiders

In his book "The Vital Few vs. the Trivial Many: Invest With the Insiders, Not the Masses," George Muzea offers several key insights into how to use the insider signal. One major takeaway: When insiders keep buying and buying as a stock goes up, that is very bullish.

Here's a great example of just such an insider: Through most of this year, Winmark (WINA, news, msgs) chief John Morgan has kept buying shares in his company as it has moved to $22 a share from $10. His most recent purchase was in late October at $22. Winmark, which franchises stores that sell secondhand items, looks like a great play on the new frugality as unemployment tops 10%.

Marc Gordon, the president of the luxury hotel chain Morgans Hotel Group (MHGC, news, msgs), is another insider who keeps buying as his company's stock advances. His most recent purchases were in the $3.15-a-share range in late October. Morgans has a lot of debt, one factor that's holding back the stock. But if the economic recovery continues, the well-heeled are likely to spend more time at Morgans hotels, where the average nightly rate is more than $300 per room.

Be sure not to buy these two stocks much above last week's levels of $22 and $3.50, respectively. As with all smaller and more thinly traded stocks, discussion in this column could move them higher. But I can almost guarantee you they would pull back quickly, and I don't want you to waste money by buying into a spike.

Continued: Insider signals you can ignore

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