From Standard & Poor's Equity ResearchWhile investing isn't—and shouldn't—be a popularity contest, bigger stocks with wide name recognition can enjoy a particular advantage over their smaller brethren: the high degree of analytical coverage from Wall Street firms. The reason: Wider coverage ensures a greater degree of investor awareness of these companies' shares, which can help foster demand for these equities.
The differences can be stark: Corporate titans like General Electric (GE
), Microsoft (MSFT
), and Apple Computer, (AAPL
) are followed by a dozen or more analysts, while smaller outfits have to content themselves with far fewer observers.
But while some stocks may not be popular among Wall Street's spreadsheet set, they may be loved by another important group—one whose opinion may mean just as much—company insiders. The thinking here is that if upper management and directors are net buyers of the shares of their own companies, that may indicate they are bullish on its prospects.
BUYING ON THE INSIDE. And that discrepancy highlighted to us a potential opportunity: Identify stocks with a scant degree of analytical coverage, and therefore limited investor awareness of their prospects, and a high degree of insider buying. To ensure that we were starting out with a universe of stable, liquid stocks, our screen was limited to companies whose market capitalization was above $250 million and per-share price greater than $5.00.
We first screened for those stocks covered by no more than a single Wall Street analyst, based on data from I/B/E/S.
Our next step: Sifting for those issues with the highest insider-buying rank as measured by a proprietary Standard & Poor's methodology. This tool indicates insider sentiment by showing whether directors, officers, and key employees were buying or selling the company's stock during the most recent six months. Stocks with unfavorable sentiment are ranked "1," neutral "2," and favorable "3."
The screen returned the following six stocks: