Monday, December 14, 2009
When I sift through insider buying information, there's one type that really grabs my attention...
It's when the chief financial officer (CFO) of a company is a large and regular buyer of his company's stock.
Why is this sort of buying so significant? It's simple. The CFO lives, eats, and breathes his company's finances. He knows the strength of his company's balance sheet. He knows how healthy his company's cash flow is. He knows what his company's future projections are.
Making sure the company has the money it needs to execute its business plan is his responsibility. Every day, it's the CFO's job to look at the numbers and understand exactly what's happening.
That's why few insiders at a public company understand its stock price better than the CFO. He, more than anyone else, can always tell if shares are cheap... if they are a screaming buy.
Of course, the CFO isn't always able to buy when shares are cheap.
For one thing, a company typically pays the CFO barely 60% of what it pays the CEO. In 2008, the average CEO pay was $346,000... The average CFO pay was $214,000. For the CFO, investing a chunk of his personal money in the company's stock can be a stretch. At the right time, he just might not have it.
And a CFO isn't usually the type to put all of his eggs in one basket. He's often the conservative accountant type. He's not going to concentrate his risk. Investment diversification is almost part of his genetic code.
Usually, only a very special situation will convince a CFO to invest his savings in the same company he's already investing most of his life. And that special situation is when shares are cheap and carry little risk.
Ask yourself: Would the CFO – the guy who knows more about his company's finances than anyone else – buy his company's stock if he thought (1) he was overpaying, (2) he might lose his money, or most of all, (3) he wouldn't get a fantastic return on his investment? It's highly unlikely.
So when the CFO buys, it pays to take notice. And when a CFO buys regularly, I really stop and investigate.
There's a lot of "secrets" marketed in the financial advisory business. Many of them aren't secrets at all. Many of them won't help you get an edge in the market.
But watching for big CFO buys is one of the great ones I've found in my career. They don't come around often, but when they do, it's a sign you have a low-risk, high-reward trade on your hands.
Oil sees six-year record tumble... eight straight days of declines carry crude below $70.
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10-year yield rockets higher... rate jumps from 3.21% to 3.54% in two weeks.