How to buy stock like a company insider

SAN FRANCISCO (MarketWatch) � When CEOs or corporate directors plunk down cash to buy shares of their company, it can speak volumes.

Such insider buying can mean executives believe their company�s shares are undervalued or its future is brighter than people realize. Or the insider believes this is the best use of their money compared to other investments.

Click to Play Hulbert: Why stocks are undervalued

The U.S. stock market is undervalued and poised for above-average longer-term returns, Mark Hulbert contends on Markets Hub. Photo: Reuters.

For investors, insider buying is reassuring. The motives are more apparent, much more so than insider sales.

An executive can sell stock for reasons that investors may never know. Perhaps they want to build their dream mansion or purchase a luxury yacht. A bigger fear for investors is the company will report poor results or the shares are overpriced. When an executive sells, the company rarely says why.

Purchasing power

Insider buying at Russell 2000 RUT �and Standard & Poor�s 500 SPX �companies perked up during April and May, according to InsiderScore, which analyzes stock purchases and sales by executives and directors for money-management firms.

The volume of buying activity prompted InsiderScore to issue an �industry buy inflection� indicator for the first time since August 2011. When it comes to insider buying, this is InsiderScore�s strongest quantitative macro signal.

�Insiders as a group are very predictive when it comes to buying. When we see widespread buying across sectors, it�s a good indication,� said Ben Silverman, InsiderScore�s director of research.

Executives moves following a sharp drop are particularly interesting, though of course they�re no guarantee a stock will rebound. Bed-mattress maker Tempur-Pedic TPX �, whose shares dove 49% June 6 when it slashed its outlook, said Friday �certain executives� intend to buy the company�s shares in the open market.

To be sure, current insider buying doesn�t have the intensity of last August, a time when insider buys climbed to a multi-year high and insider stock sales were extremely low, according to Silverman. Since Jan. 1, there�s been enough insider selling to mute the bull horn on U.S. stocks.

MarketWatch asked InsiderScore to mine its database for 2012 buys made by executives or directors who have demonstrated a knack for making timely purchases or continue to build positions in companies they are involved with. Interestingly, no CEOs made the cut.

Here are the people InsiderScore found:

Barry Diller: Coca-Cola

Talk about buying with conviction. Coca-Cola Co. director Barry Diller has been buying shares of the beverage giant as if there will be a run on Coke KO �at the supermarket. Diller, who runs media conglomerate InterActive Corp., has dropped $114 million to acquire nearly 2 million shares in a series of transactions since March 2009. Read more: Diller's Coca-Cola Form 4 SEC filing.

Those buys have earned a 32% return, according to InsiderScore. With each transaction, Diller has bought Coke shares at an even higher price � his latest being a 264,000-share purchase on April 27 for $20.3 million. Coke was trading near a 52-week high at the time.