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Investing in Insider Buying

Written By Brian Hicks

Posted February 15, 2008

As part of our ongoing educational Wealth Daily series, including How to Invest in LEAPS, How to Invest in Options, and Lockup Expirations I wanted to bring your attention to investing in insider buying trends… and, specifically, how to spot trends with bullish insider and billionaire buying.

Let’s start with E*Trade (ETFC:NASDAQ).

What I like most about this company is the insider buying momentum that followed the stock’s triple digit one-month move. It speaks volumes on confidence, and explains the recent surge in option volume.

Sure, the stock took a major dive in 2007, but that’s because it got itself involved in a business it shouldn’t have been in – subprime.

But like I said, there’s insider confidence.

About 10 insiders are betting heavy that E*Trade Financial will turn itself around this year:

  • Hayter, director 4,917 at $4.06
  • Layton, director 245,800 at $4.06
  • Fisher, director 31,806 at $4.06
  • Randall, director 29,500 at $4.06
  • Parks, director 24,586 at $4.06
  • Raffaeli, director 12,293 at $4.06
  • Lilien, acting CEO 7,376 at $4.06
  • Weaver, director 68,843 at $4.06
  • Brewster, director 24,586 at $4.06
  • Willard, director 11,942 at $3.98 and 13,058 at $3.99

What’s painfully overlooked is Layton’s 245,800 purchase at $4.06 a share.

Fortunately, as highlighted by insider moves, there’s a good chance the bad news has been factored in. Yes, they posted a loss after a $2.2 billion charge related to the sale of the asset-backed securities portfolio, but the company also unveiled a turnaround plan that could return the company to profitability this year.

Better still, bullish moves have already been made by the company. In November 2007, for instance, the company sold a part of their mortgage portfolio to Citadel Investment, and secured $2.55 billion cash infusion.

Plus, it’s exiting its institutional trading business, which means it’ll have more time to focus on retail banking and brokerage operations – something it should have been doing all along.

As for potential upside, a near-term fill of the $8 gap isn’t out of the question, considering low valuations and attempts at a turnaround.

Another way to profit from insider buying is to follow the billionaires, excluding Warren Buffett. That’s because every one follows Buffett.

Investing in Insider Buying: Following the Billionaire Buyers

Just why did Carl Icahn buy 2.74 million shares of Biogen Idec (BIIB) for $146.5 million in mid August 2007?

Investors believed that, given Icahn’s medical background, it may have had something to do with the perceived success of Tysabri, the controversial multiple sclerosis drug that was pulled from the market after some users developed a deadly brain disease. Tysabri, according to some estimates, could be a $1 billion MS drug by 2010. And should it be approved for Crohn’s disease, there’s even more upside potential.

As an investor, Icahn may have viewed BIIB as an undervalued buyout target. The company was trading at a paltry 37 times earnings, as compared to the 48 times earnings it traded at prior to Tysabri’s withdrawal.

Had you followed Icahn and bought around $55, you would’ve had a $30 gain two months later.

Who was I to argue with billionaire logic? This was the same man who increased his stake in MedImmune by 50% before it was sold to AstraZeneca for $15 billion, doubling MedImmune’s market value.

In any case, when a billionaire goes shopping, pay close attention. They didn’t make their money by investing in just anything . . .

As Brian Hicks told you the other day, he and I used to follow media tycoon Sumner Redstone, another multi-billionaire, as he bought Midway Games and WMS Industries in the open market.

Midway Games (MWY) quadrupled in value in 2003 going from $3 a share to $12 a share.

WMS Industries (WMS) went from $12 to $21 inside of six months.

It’s not every day a billionaire plunks down millions… even billions for stock in a company. These people are in the know, and don’t have time or money to waste on losers, which is why we’re excited about another favorite billionaire that just acquired a three million share stake in a natural gas company that we talk about here.

Ian L. Cooper