Financial advisers often warn investors to watch for insider selling as proof that company executives have lost faith in the business. But Cramer says a director that is selling shares could just as easily be generating cash to buy a house as preparing to jump ship. He’d rather concentrate on insider buying, specifically the kind that happens when a stock is at or near its 52-week high.
When an executive buys shares of his own company when the stock is at its peak, Cramer sees that as a sign that the exec thinks the business is undervalued, that there’s room for the stock to move. This may sound like hubris, Cramer says, but it’s probably bankable hubris.
L-3 Communications had just such a buy back in February, two of them actually. LLL is the archetypal high-tech defense contractor, and it specializes in communications and sensor gear. A couple of months ago, two directors bought a combined 60,000 shares of the company for as much as $87.20, very close to the stocks 52-week high. LLL is now at $93 and change, and Cramer thinks there’s still room to run.
Apparently, a lot of analysts are sitting on the sidelines with this stock, but they can’t stay there for long. There are eight “buys,” nine “holds” and two “sells” on LLL, and Cramer is betting that the “holds” will be forced to upgrade, propelling the stock higher. And if those analysts need something to latch on to, L-3 did just raise its guidance. What’s better is that Cramer thinks even with the increased estimates the company still set the bar low so it could blow out the numbers.