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.
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.
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 doesn't mean it will play out that way.
Insiders can have all the conviction in the world 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, it’s 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 growth potential. This is why it's so important to always be monitoring insider activity, but it's 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.
One stock whose insiders are doing some active buying in is Nanosphere , which develops, manufactures and markets an advanced molecular diagnostics platform, the Verigene System, that enables sensitive genomic and protein testing on a single platform.
Insiders clearly see value here; this stock has been crushed in 2011, with shares down over 70 percent. Nanosphere has a market cap of $49.96 million and an enterprise value of -$7.18 million. The company is currently not profitable, with an operating cash flow of -$32.94 million and levered free cash flow of -$26.31 million.
This is a cash-rich company, since the total cash position on its balance sheet is $54.53 million and its total debt is zero. A director and beneficial owner just bought 285,235 shares, or $314,928 worth of stock, at $1.10 per share. The CEO also recently bought 10,000 shares, of $9,000 worth of stock, at 90 cents per share.
From a technical standpoint, this stock is currently below both its 50-day and 200-day moving averages, which is bearish. That said, the stock is quickly approaching a crossover of its 50-day of $1.25, and volume going into the potential move is strong.
Volume last Wednesday hit over 670,000 shares as the stock closed up 5.5 percent. That volume is well above its three-month average volume of 347,700 shares.
If you like this stock, I would look to get long once it busts above that 50-day moving average with volume. I would then add aggressively to any long position once the stock takes out $1.38 to $1.48 a share with volume.
Target a run back toward $1.70 or possibly even higher if this stock wants to trend up significantly from current levels. Use a mental stop just below the 50-day if/when it does cross back above that key technical level.
Forest City Enterprises
Insiders are also doing some notable buying in Forest City Enterprises , which is engaged in the ownership, development, management and acquisition of commercial and residential real estate and land in 27 states and the District of Columbia.
This is another example of insiders finding value in a stock; Forest City is off by around 25 percent so far in 2011. Forest City has a market cap of $2.09 billion and an enterprise value of $8.53 billion. This company is currently not profitable with an operating cash flow of $335.83 million and a levered free cash flow of -$139.25 million.
This is far from a cash-rich company, with a total cash position on its balance sheet of $413.91 million and total debt of $6.86 billion. The CEO and president just bought 36,923 shares, or $428,360 worth of stock, at $11.17 to $11.73 per share.
From a technical standpoint, this stock is currently trading just above its 50-day moving average and well below its 200-day moving average, which is neutral trend-wise. This name has just started to move back above the 50-day of $12.23 on heavy volume, which is bullish.
Volume Tuesday registered 2.8 million and on Wednesday it hit a whopping 4 million. Both days easily surpassed its three-month average volume of 1.48 million shares.
If you're bullish on this name, I would look to buy some shares once it trades above $12.55 a share with solid volume. I would then add to any long position once it takes out more overhead resistance levels at $13.60 to $14.35 a share with volume. Use a mental stop at around $12 a share in case this stock isn't ready to start challenging some of those past overhead resistance zones.
One market-leading stock that insiders are stepping up and doing some buying in is Dollar Tree , which operates discount variety stores in the U.S. and Canada. Insiders are paying up here to own stock, since this name has returned over 40 percent so far in 2011. This company has a market cap of $9.82 billion and an enterprise value of $9.5 billion.
The stock trades at a reasonable valuation, since its trailing price-to-earnings is 22.3 and its forward price-to-earnings is 17.4. Dollar Tree's estimated growth rate for this year is 21.6 percent, and for this year it's pegged at 16.8 percent.
This is a cash-rich company; the total cash position on its balance sheet is $545.40 million, and its total debt is $265.50 million. After you back out the debt, Dollar Tree has $279.90 million of cash on the books.
A director just bought 5,000 shares, or $399,211 worth of stock, at $79.84 per share. This same director also bought 5,000 shares, or $325,000 worth of stock, at $63.14 per share back in June.
From a technical standpoint, this stock is currently trading well above both its 50-day and 200-day moving averages, which is bullish. The stock has also just started to break out above some past overhead resistance at $79.35 a share. The only problem with this recent breakout is that it's coming on light volume. That said, the stock is now trading near brand new all-time highs.
If you like this stock, I would probably hold off on getting long since the breakout volume is light and the relative strength index is near 70, which indicates an overbought condition.
I would look to get long on the next meaningful pullback that takes the stock closer to its 50-day moving average of $73.23. Keep in mind that if volume does start to come in and the stock is above $81, then it might just get momentum and trend up despite the overbought condition.
Trans World Entertainment
Insiders have also been scooping up shares of Trans World Entertainment , which operates retail stores and three e-commerce sites and is a specialty retailer of entertainment software, including music, video and video games and related products in the U.S. Insiders are paying up here to own shares of Trans World; the stock is up over 30 percent so far in 2011.
This company has a market cap of $69.83 million and an enterprise value of $53.23 million. The stock trades at a price-to-sales of 0.12 and a price-to-book of 0.46. Its current cash flow is $15.66 million, and its levered cash flow is $18.22 million.
This is a cash-rich company, with a total cash position of $22.49 million and total debt of $6.21 million. After you back out the debt, Trans World has $16.28 million in cash on the books.
The CEO and chairman of the board just bought 75,000 shares, or $155,985 worth of stock, at $2.07 to $2.14 per share. This same CEO also bought 200,000 shares, or $410,000 worth of stock, at $2.05 per share back in late August.
From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. The stock has also just started to break out above some past overhead resistance levels at $2.14 to $2.18 a share on strong volume.
If this breakout is the real deal, then this stock could be setting up to trend significantly higher from current levels.
If you're bullish on this stock, I would look to get long off any notable weakness and simply use a mental stop at around $2.10 or $2 a share. If the stock does start to ramp up big from here, and you get long, I would then add aggressively once this stock takes out $2.70 a share with volume.
Look for volume that's tracking in well above its three-month average action of 8,829 shares.
In the retail grocery complex, insiders are snapping up shares of Vitacost.com , an online retailer and direct marketer of health and wellness products, including dietary supplements, cosmetics, organic body and personal care products and health foods.
This stock hasn't done much so far in 2011, with shares down around 2.6 percent. Vitacost.com has a market cap of $154.34 million and an enterprise value of $140.15 million. The stock trades at a rich valuation, with a forward price-to-earnings of 92.42. Their estimated growth rate for this year is -328 percent, and for next year it's pegged at 120 percent.
This is a cash-rich company, with a total cash position of just $16.28 million and total debt of zero. The CEO just bought 40,000 shares, or $212,122 worth of stock, between $5.23 and $5.38 per share. This same CEO has been steadily buying stock since September that now totals over $779,000.
From a technical standpoint, this stock is currently trading above both its 50-day and 200-day moving averages, which is bullish. During the last three months, this stock has found some big buying support at around $4.15 to $4.30 a share. The stock is now approaching a big breakout if it can manage to move above some significant overhead resistance.
If you're looking to buy this stock, I would look to get long once it breaks out above $5.67 and then $6.20 a share with solid volume. Look for volume that's tracking in close to or above its three-month average action of 75,000 shares.
I would get long over $5.67 and then add aggressively over $6.20 a share as long as the volume is tracking in strong. One could also wait for some weakness and buy at around $5.20 to $5 a share and simply anticipate the breakout.
Use a tight mental stop no matter if you buy it off of weakness or strength so you make sure to limit your risk.
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