Insiders Corner offers analysis of significant insider purchases at small-cap and micro-cap stocks.
|Insiders Corner returns as of December 22, 2005:|
About Insiders Corner:
Corporate insiders, as we all know, offer excellent signals about where the stocks of their companies might be headed — through the open market purchase and sale of that stock. After all, they have the front row seats. The research services tracking insider activity, however, typically focus on big companies only. This is because these research services want to land big clients who can only buy big stocks.
That’s where our weekly Insiders Corner column comes in. Insiders Corner offers analysis of significant insider purchases at small-cap and micro-cap stocks. That means anything under $1 billion in market cap. But generally the companies will be much smaller than that.
The insider signals at smaller companies like these can precede phenomenal gains in a stock, exactly because few investors are watching companies in this corner of the market. These tiny companies, for example, typically don’t even have any Wall Street analyst coverage. So in many cases, the insider signal is one of the only ways that we – as outsiders – can get the message that good things are about to happen.
At Insiders Corner, we will use the insider signals to select picks every week, when available, with a summary of the business trends that may lead to stock price gains. Then we will track the picks in a live portfolio.
Anyone who plans to use Insiders Corner as a source of investment or trading ideas should keep the following key points in mind.
- Insiders tend to be early with their transactions. Insiders are good at spotting value in their own shares, but they are lousy market timers. They buy early, and it is not unusual for a stock to decline after the initial spike sparked by their purchases. The chances are good, however, that significant insider buying will be followed by some good news – and share appreciation — over the next six months. In short, be patient when following the insiders.
- Investors following this column are reminded not to bet the farm on any single stock. Yes, insiders are smart, but they can also be wrong. So as a general rule, you shouldn’t put more than 2% to 5% of your overall portfolio in any single position. If you invest more, you are gambling, which isn’t necessarily a bad thing. But you should be fully aware that you are gambling, not investing, and accept all the additional risks that come along with that activity – like the risk that you could lose too much of your money because of poor diversification.
- Investors following this column are urged to acknowledge when an idea is not working out – by selling a stock and taking losses soon enough to prevent more serious damage. As a general rule, many investors automatically sell a stock after a 25% or 30% decline, based on the idea that such a decline suggests some sort of problem that someone knows about, even if you don’t. This won’t always be the case. Sometimes the stocks of decent companies decline rapidly because of profit taking or sloppy exits by careless fund managers. But as a general rule, when the declines start to get steep it is better to cut losses, and make up for it by letting your winners run.
- We will provide disclosure.Whenever I have a position in a stock featured in this column, I will disclose it. I will also refrain from selling the position for three trading days from publication – the amount of time it should take for any market impact to wear off. If I do not have a position in a stock featured in this column, that does not make the stock any less valid as a pick. I may already have enough exposure in that sector, or enough exposure to the market overall, or I may be waiting for another position to mature before moving into a new position. I never get any form of compensation from the companies I write about, or any third parties. I never get any form of compensation from InvestorIdeas.com to feature specific companies. I am completely independent in my choices about what companies to put in this column. I select companies on the basis of the strength of the insider signal, conversations with analysts and the companies, and my own research.
- Small-cap stocks may be subject to more risk than stocks of larger companies. Small-cap stocks tend to have lower liquidity and greater volatility. And often there is less publicly available information. Be prepared to deal with the frustrations that can come along with these factors, if you buy small cap stocks. On the other hand, these stocks can produce enormous gains for the very same reasons – because they are small and undiscovered. Before those gains occur, you may need the strength to stomach the inevitable ups and downs in this corner of the market.
While I can’t provide personalized investment advice, I welcome comments and feedback at email@example.com