Identify This “Tell” and Beat the Stock Market Casino

by David Fessler, Investment U Senior Analyst
Friday, January 06, 2011: Issue #1681

A lot of my friends are comparing the stock markets to a giant casino these days. They tell me “it’s a rigged game.”

They basically have no hope in beating Wall Street and the high-frequency computer traders.

I completely understand how they feel. The markets have been a treacherous place for the average investor. It’s been nothing but a whipsaw ever since last July when Eurozone fears took hold.

But as my colleague Alexander Green has stated countless times, “Investors should tune out all the end-of-the-world hysteria and think rationally.” And one of Alex’s favorite ways to beat the market is to identify “tells.”

The Art of Reading a “Tell”

Those who have played poker understand what a “tell” is. It’s some sort of unconscious behavior that a poker player exhibits which tips other players to the strength of his/her hand.

If you ever watch a professional poker tournament on television you’ll notice many players wearing large sunglasses and hats. (I tried this in a tournament last fall. I lost anyway.) They do this in an attempt to hide any unconscious signals they may be transmitting to the other players.

Well there’s also a type of “tell” that can help investors identify stocks that are about to make significant gains. And that’s by tracking corporate insider stock purchases.

Companies are required to disclose insider purchases by the Securities and Exchange Committee (SEC). As Peter Lynch famously said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the stock price is undervalued and will eventually go up.”

The Proof is in the Pudding

In Hasan Nejat Seyhun’s book Investment Intelligence from Insider Trading, published in 2000, he found that insider trading information is in fact more valuable than several other valuation measures, and can be used to improve investment returns.

However, by the time insider buying at a company becomes public knowledge, shares are often much higher than when the insiders bought them.

With the market’s recent multi-hundred-point moves in both directions, it’s created a few bargains in the shares of insider stocks. Here are a few sitting within a few percentage points of where insiders bought them.

Insider Buying Bargain #1

NYSE Euronext (NYSE: NYX) provides trading technologies around the globe. Its service offerings include equities, options, futures, ETFs, swaps, bonds, clearing operations, market data and carbon trading.

It operates on the NYSE, AMEX and NYSE Arca here in the United States. In Europe, it operates on the NYSE Liffe derivatives market in Lisbon, Amsterdam, Brussels, Paris and London.

Its CEO, Duncan L. Niederauer, and one of its Directors, Duncan M. McFarland, collectively purchased 35,000 shares this past August at prices ranging from $25.50 to $27.38 per share. The stock closed December 30 at $26.10 and currently sports a healthy dividend yield of 4.6%.

Insider Buying Bargain #2

Archer Daniels Midland Company (NYSE: ADM) processes corn, wheat, oilseeds, cocoa and numerous other agricultural commodities. It manufactures corn sweeteners, vegetable oils, flour, biodiesel, protein meal, and other ingredients for animal feed and edible foods.

The company has a vast network of grain elevators and transportation networks to store, clean and transport the commodities it deals in.

Executive VP and COO Juan R. Luciano, along with two other company officers, purchased a total of 9,650 shares back in August of last year, priced between $27.42 and $28.23. Shares of Archer closed on December 30 at $28.60. The company currently yields 2.45%.

Insider Buying Bargain #3

Landline telephone systems are generally very reliable here in the United States and other developed nations. But sometimes Mother Nature has other ideas, and wreaks havoc by bring down trees and wires along with them.

That’s when equipment from Telular Corporation (Nasdaq: WRLS) comes in handy. Telular designs and manufactures equipment that interfaces things like fax machines and other data and services normally sent over land lines.

Remotely located equipment without landline access is also able to be interfaced using Telular’s products and services. Supply chain management, vehicle tracking, security monitoring, and other commercial and industrial applications all make use of Telular equipment.

Business is booming. As evidence, the company raised its guidance and increased its dividend. Robert Deering, company CAO and Controller, must think so, too. He increased his ownership this past December, purchasing 3,175 shares at $7.54.

The company’s shares closed on December 30 at $7.50 a share. Telular currently yields 5.87%, a rather healthy dividend. But this company appears to be going places, so there’s an excellent chance it will continue to generate the cash to pay it.

Should You Buy Them, Too?

I can’t give you personalized investment advice. Ultimately you should weigh the merits (and the business) of each of the companies mentioned, and consult with your investment advisor.

But insider buying is usually a sign that the company executives believe their operation is undervalued. By nature, they’re contrarian investors. Remembering the words of my friend Rick Rule: “You’re either a contrarian, or a victim.”

Good investing,

David Fessler