What are we looking for?
Strong buying of a company's shares by the firm's managers and directors has long been considered a good indication that a stock is ready to roar. After all, if the insiders who know a company best are buying its stock, then they must have confidence in what lies ahead. In keeping with that theory, we sought the Canadian stocks with the strongest insider buying over the past three months.
How we did it
Bloomberg has developed a screen that searches for companies with heavy buying by insiders. The screen examines companies with market capitalizations of $100-million or more and ranks them on the basis of four criteria:
- amount of insider buying
- total amount of management buying
- insider buying as a percentage of the total trading volume
- management buying as a percentage of the total trading volume
Bloomberg then calculates a score based on these four criteria. Stocks scoring 100 show the most insider and management buying over the past three months.
What we found
Our list shows the 20 Canadian stocks with the strongest insider buying over the past three months. Each of them has enough potential to entice managers and directors to put down their own cash for shares in the firm.
Investors should be aware, however, that buying stocks on the basis on insider buying is not a foolproof recipe for success. Bloomberg looked at how someone who bought the top 20 stocks in the United States and Canada based on the results of its insider-buying screen would have fared. Since 2002, such an investor would have lagged behind the S&P 500 by a wide margin.
"This 10-year backtest invalidates the theory that heavy insider buying is a determinant of outperformance," Bloomberg says.
Fair enough, but insider buying remains a powerful indicator that a company's best-placed observers are feeling bullish about its future. That suggests that investors who are willing to do additional research may find several gems on today's list.