Stock Quotes in this Article: AEO, ARUN, ETRM, KEG, TSPT

WINDERMERE, Fla. (Stockpickr) -- Corporate insiders sell their own companies’ stock for a number of reasons.

They might need the cash for a big personal purchase such as a new house or yacht, or they might need the cash to fund a charity. Sometimes they sell as part of a planned selling program that they have put in place for diversification purposes, which allows them to sell stock in stages instead of selling all at one price.

Other times they sell because they think their stock is overvalued and the risk/reward is no longer attractive. Some even dump their own stock because they have inside knowledge that a competitor is eating their lunch and stealing market share.

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    But insiders usually buy their own shares for one reason: They think the stock is a bargain and has tremendous upside.

    The key word in that last statement is “think.” Just because a corporate insider thinks his or her stock is going to trade higher, that doesn’t mean it will play out that way. Insiders can have all the conviction in the world that their stock is a buy, but if the market doesn’t agree with them, the stock could end up going nowhere. Also, I say “usually” because sometimes insiders are loaned money by the company to buy their own stock. Those loans are often sweetheart deals and shouldn’t be viewed as organic insider buying.

    At the end of the day, its large institutional money managers running big mutual funds and hedge funds that drive stock prices, not insiders. That said, many of these savvy stock operators will follow insider buying activity when they agree with the insider that the stock is undervalued and has upside potential. This is why it’s so important to always be monitoring insider activity but twice as important to make sure the trend of the stock coincides with the insider buying.

    Recently, a number of companies’ corporate insiders have bought large amounts of stock. These insiders are finding some value in the market, which warrants a closer look at these stocks. Here’s a look at some stocks where insiders have been doing some big buying in per SEC filings.

     

    Aruba Networks

    Insiders have been loading up on shares of Aruba Networks (ARUN), a communications services company that connects local and remote users to corporate information technology resources via distributed enterprise networks. Insiders are buying the dip here; this stock has dropped from its May high of $36.40 to its current price of just over $22 a share.

    Aruba Networks has a market cap of $2.35 billion and an enterprise value of $2.13 billion. This stock trades at a premium valuation, with a trailing price-to-earnings ratio of 37 and a forward price-to-earnings of 27.8. Aruba’s estimated growth rate for this year is 6.8% and for next year it’s pegged at 27%. This is a cash-rich company, with a total cash position on its balance sheet of $233.96 million and total debt of zero.

    A director just bought 660,069 shares, or $12.8 million worth of stock, at $19.44 per share. This same director also recently bought 345,000 shares, or $6.98 million worth of stock, at $20.24 per share.

    From a technical standpoint, this stock is currently trading below both its 200-day moving average and above its 50-day moving average, which is neutral trendwise. Since hitting a low in August at $16.20 a share, this stock has been making higher lows and higher highs, which is bullish. It would now be constructive for this stock to stay above its 50-day moving average of $20.96 if the bulls are now in control.

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    The way I would play this stock is to buy it once it breaks out above some near-term resistance at $24 a share on big volume. Look for volume that’s tracking in close to or well above its three-month average action of 4.2 million shares. I would add aggressively to any long position once this stock takes out its 200-day moving average of $26.30 on heavy volume.

    This is a heavily shorted stock, with over 20% of the tradable float currently sold short by the bears. It’s worth mentioning that the bears have been increasing their bets from the last reporting period by 11.7%, or by about 2.1 million shares. Look for the shorts to cover and buy back the stock if ARUN can get back above its 200-day moving average in the near future.

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    American Eagle Outfitters

    In the retail apparel sector, a stock that just saw some huge insider buying is American Eagle Outfitters (AEO), an apparel and accessories retailer that operates more than 1,000 retail stores in the U.S. and Canada and online at ae.com. Insiders are buying this stock into weakness since shares are off by 16.6% this year and by over 20% in the last six months.

    This company has a market cap of $2.38 billion and an enterprise value of $1.89 billion. This stock trades at a fair valuation, with a trailing price-to-earnings of 14.4 and a forward price-to-earnings of 12.3. American Eagle’s estimated growth rate for this year is -15.7%, and for next year it’s pegged at 15.1%. This is an extremely cash-rich company, with a total cash position on its balance sheet of $514 million and total debt of zero.

    A director and chairman of the board just bought 1,000,000 shares, or $11.2 million worth of stock, at $11.06 to $11.28 per share. Another director recently bought 120,000 shares, or $1.3 million in stock, at $11.11 to $10.92 per share.

    From a technical standpoint, this stock is currently trading below its 200-day moving average and above its 50-day moving average, which is neutral trendwise. This stock recently found some big buying support at around $10 to $11 a share. Since those buyers stepped in, the stock has now broken out above some overhead resistance at $11.70 to $12 a share. If that breakout holds, then this stock could be setting up to trend much higher.

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    I would be a buyer of this stock on any weakness that takes shares close to $12. I would simply use a stop just below its 50-day moving average of $11.73 in case this stock isn’t ready to run higher. I would add to any long position once AEO then trades back above its 200-day moving average of $13.75 on strong volume.

    This is a heavily shorted stock with over 10% of the tradable float currently sold short by the bears. It’s worth mentioning that the bears have been increasing their bets from the last reporting period by 27.2%, or by about 3.8 million shares. Put this name on your radar for a potential short-squeeze trade that sets the stock up to challenge that 200-day in the near future.

    American Eagle is one of the highest-yielding retail stocks and was featured recently in "Internet Is New Battlefield for Teen Apparel Retailers."

    Transcept Pharmaceuticals

    One biotechnology player that insiders have snapped up a huge amount of stock in is Transcept Pharmaceuticals (TSPT), a specialty pharmaceutical company focused on the development and commercialization of products that address important therapeutic needs in neuroscience. What’s interesting here is that insiders are loading up on stock into strength; shares are up a whopping 150% in the last month.

    This company has a market cap of $98.98 million and an enterprise value of $30.77 million. Transcept is not profitable yet, since its operating cash flow is -$18 million and levered free cash flow is -$16.7 million. It is a cash-rich company, with a total cash position on its balance sheet of $59.63 million and total debt of just $475,000.

    A director and beneficial owner just bought 732,076 shares, or nearly $5 million worth of stock, at $6.59 to $7.24 per share.

    From a technical standpoint, this stock is currently trading above its 50-day and right below its 200-day moving average, which is neutral trendwise. The stock recently made a monster move from its September low at $2.60 a share to its current price of just over $7 a share. During that run, the stock saw some monster upside volume flow into the name, which is very bullish.

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    If you want to buy this stock, I would load up on this name for a trade once it breaks out above its 200-day moving average of $7.66 a share on big volume. Look for volume that’s tracking in close to or above its three-month average action of 484,000 shares. I would add aggressively to any long position once this stock then takes out the next significant overhead resistance level at $8.75 a share. A move above both of those levels should set this stock up for a run back towards $12 a share or possibly even higher.

    Once again, we have a heavily shorted stock here, with over 7.1% of the tradable float currently sold short by the bears. Look for another big short squeeze to get started if this stock takes out its 200-day moving average in the coming days or weeks. I wouldn’t want to be short this stock if that level is taken out with volume.

    Transcept shows up on a list of 10 Biotech Trades for Second Half of 2011.

    Key Energy Services

    A stock in oil well and services and equipment complex that a key insider has done some big buying in is Key Energy Services (KEG), which provides a range of well services to major oil companies, foreign national oil companies and independent oil and natural gas production companies. It looks like insiders see some value here; this stock is down over 22% so far in 2011.

    This company has a market cap of $1.42 billion and an enterprise value of $2 billion. This stock trades at a very cheap valuation, with a trailing price-to-earnings of 13.5 and a forward price-to-earnings of just 5.59. Key Energy’s estimated growth rate for next year is pegged at 78%. This is not a cash-rich company; its total cash position is just $14.64 million, and its total debt is $572.55 million.

    A beneficial owner just bought 357,924 shares, or $3.2 million worth of stock, at $9.06 per share.

    From a technical analysis, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been crushed in just the past two months from its August high of $20.77 a share to its current price of around $10 a share. That said, this stock has seen some big upside volume flow into the name after it hit a recent low of $8.68 a share.

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    If you’re looking to buy this stock, I would consider jumping in long here off any significant weakness along as the upside volume continues to show strong tends. Look for the up days to register volume that’s close to or above its three-month average action of 2.9 million shares, and look for down days to show volume well below that level. This stock represents a rebound trade since shares are so beaten down, so use that recent low of $8.68 as your stop out point.

    I would add to any long position once this stock takes out its nearest overhead resistance level at $11.06 a share on strong volume. A move above that level with volume should set this name up to re-test its 50-day and 200-day moving averages.

    This is another heavily shorted stock, with over 7.5% of the tradable float currently sold short by the bears. It’s worth noting that the bears have been increasing their bets from the last reporting period by 11.5%, or by about 1.04 million shares. Look for a big short squeeze to kickoff once this stock trades above $11.06 on heavy volume.

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    Enteromedics

    Insiders have also been active in penny stock Enteromedics (ETRM), a development-stage medical device company focused on the design and development of devices that use neuroblocking technology to treat obesity, its associated co-morbidities and other gastrointestinal disorders. Insiders see some deep value here; this stock has been hammered down by over 44% so far in 2011.

    This company has a market cap of $47.45 million and an enterprise value of $25.88 million. Enteromedics isn’t a profitable company yet, since its operating cash flow is -$15.8 million and its levered free cash flow is -$11.7 million. It is a cash-rich company, with a total cash position on its books of $27.21 million and total debt of $5.65 million. When you back out that debt, Enteromedics has $21.56 million in total cash.

    A beneficial owner just bought 1,450,000 shares, or $2.1 million worth of stock, at $1.65 per share. It looks like this purchase was done as part of a private placement of stock.

    From a technical standpoint, this stock is currently trading below both its 50-day and 200-day moving averages, which is bearish. This stock has been crushed in the past two months, with shares falling from an August high of $2.74 a share to its recent low of $1.58 a share. Since hitting that low, the stock has found some buying support as the upside and downside volume expanded dramatically. This type of volume pattern can often mark a bottom in any stock.

    If you’re looking to buy this stock, I would get long off any weakness and simply set a stop just below that $1.58 a low. I would add to any long position once this stock trades above some past overhead resistance at $1.75 a share on heavy volume. Look for volume that’s tracking in close to or above its three-month average action of 45,200 shares.

    To see more stocks with notable insider buying, including Saul Centers (BFS), Federal-Mogul (FDML) and Viropharma (VPHM), check out the Stocks With Big Insider Buying portfolio on Stockpickr.

    -- Written by Roberto Pedone in Winderemere, Fla.

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    At the time of publication, author had no positions in stocks mentioned.

    Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.