We all love insider buying. It’s simple, it’s easy, and it’s historically supportive of stock prices — all else being equal. The people who know a company best are buying the stock, with their own money? That’s a good endorsement.

It’s not perfect, of course. Sometimes gazillionaire CEO’s buy 100 shares a week just so they can say there’s “insider buying” happening. Sometimes lazy reporters or automated article robots tell us that there’s “insider buying” when really the executives are just getting stock grants, or exercising their stock options. But if you get a pattern of high-level executives buying meaningful amounts of stock in their own company, that is, on average a good thing. When that has happened in the past, according to a variety of academic studies that tracked this data in decades past, the stock with insider buying beats the market over the next 18 months or so. Not by 1,000%, but by a little bit… and over time, a little bit can be enough to boost a portfolio.

We also just generally like the idea of executives and employees who have an “ownership” attitude about the company — that’s why I don’t object to even very large equity awards for good employees, you want the people who work for the shareholders to also be working for themselves, we all tend to work hardest and smartest when we work for ourselves.

So the logic of buying stocks where there’s insider buying is generally strong — it isn’t perfect, it doesn’t guarantee success, but it improves your odds of investing in a company that will perform well in the next couple years. Sometimes insiders are idiots, too, or drink too much of their own Kool-Ade and don’t see their own company going down the tubes, but, well… if investing was easy, it wouldn’t be any fun.

That means I’m always willing to take a gander at a newsletter that’s promising some good “insider buying” stock tips — at least they’re looking in a reasonable place for their next great idea. And this time it’s Alexander Green of the Oxford Club, who’s pitching an “upgrade” newsletter called Insider Alert ($1,995/yr, no refunds). The primary bait they’re dangling in the ads is a report bout “Three Must-Own Stocks With HUGE Insider Buys,” so that’s what catches my eye today.

What are they? First, I should note that this is, strangely, a short-term trading service. Green says these are typically 90-day trades, positions that are held for only a few months, and sometimes levered up using options — I say “strangely” because the studies I’ve seen of insider trading data don’t indicate that there’s any immediate pop for shares that have insider buying… but who knows, maybe he sees some kind of pattern there. I’m more interested in whether these stocks have long-term potential, but we’ll see.

We’ll skip over all the marketing speak in the beginning of the ad and jump right to the stock ideas, if you don’t mind… here are the clues for the first of these “Three Must-Own Stocks With HUGE Insider Buys”:

“Well, major insider purchases were just reported at three different stocks.

“Each one is an urgent buying opportunity.

“The first is a real estate investment trust (or REIT)…

“The same type of real estate that Warren Buffett favors.

“First quarter net income increased nearly 680% over last year…

“An unprecedented jump.

“Meanwhile, after a pandemic slowdown, the company is back on track for pre-COVID-19 profitability levels in 2022.

“And it just raised the dividend by 7%.

“The CEO is PILING in.

“He just bought $3.3 million worth.”

OK, so that’s American Assets Trust (AAT), a relatively small ($1.8 billion market cap) West Coast REIT that owns mostly office and retail properties, with some hotel and multifamily developments also contributing to cash flow.

In AAT’s favor, they are a self-managed REIT, so they don’t have an external manager pushing up costs… they are focused in parts of the country that are mostly pretty prosperous and growing… and, yes, their CEO is buying shares. And he’s no dummy — AAT was founded by Ernest Rady back in 1967, and Rady has also built some other lage companies — he also founded what is now ICW Group, an insurance company, and Westcorp, a big financial services firm that ended up getting sold to Wachovia. He’s got a lot of enthusiasm, he’s usually described as being full of “entrepreneurial zeal,” though he is getting up to Buffett-like levels of experience — Rady was born in 1937, so he’s now 85 and is still the CEO and Chair of AAT, and he’s been buying 10,000+ shares a week for months now through his various trusts and family funds, mostly buying in the low $30s (it’s at $29 at the moment). From a quick glance at the filings, it looks like he owns about 18% of the company.

How does the business look right now? To me, it looks OK. In the first quarter, they offered guidance of $2.17 per share in expected FFO per diluted share, which is not big growth (that’s about 2% growth from last year), but is more than enough to pay the dividend and have some cash flexibility. That means they’re trading at a price/FFO of about 13 — not dirt cheap, but pretty reasonable… and the current dividend offers a yield of about 4.4% at $29 a share, and was indeed boosted by almost 7% at the beginning of this year.

The big boon recently has been the recovery at their one hotel property, which is in Hawaii, with occupancy jumping from 48% to 73% over the past year, but their other properties seem to be holding up pretty well, too — occupancy in their office, retail and multifamily properties is in the 92-94% range, which is pretty good, especially for offices right now (offices are about 58% of the rental revenue at this point, and the biggest geographic exposure is to Southern California, where half of the total property portfolio is sited). Rentas are falling for their retail properties, but rising for office properties.

You can check out AAT’s latest investor presentation here, from the NAREIT conference last month — seems like a reasonable real estate company to me at first glance, they don’t have any immediate debt pressures and they don’t have any secured debt to worry about, with most of their maturities spread out over the next decade, so they shouldn’t get a refinancing shock anytime soon. They can easily pay the dividend, though the current yield and the dividend growth are not particularly high, and they do have some projects under development that should keep revenue growing. I don’t have any expertise in West Coast real estate or the value of their properties, but Ernest Rady sure does, and he’s still buying.

Not sure why Green says that this is the kind of investment that Warren Buffett favors, however — Berkshire has very little exposure to commercial real estate for a company of its size, and almost none of Berkshire’s portfolio is in real estate-focused companies or REITs… though yes, Buffett has invested meaningfully in at least one REIT in recent years, with Berkshire still sitting as one of the largest shareholders of STORE Capital (STOR). That’s a $300 million position, and the company has gotten a premium valuation because of the Berkshire connection, though I should point out that STOR shares are only 0.1% of Berkshires portfolio of publicly traded stocks.

What’s next?

“The second play is a company with $39 billion in assets with forecasts sending it as much as 116% higher in the coming year.

“And yes…

“It just saw cluster buying between the CEO, CAO, a director and an executive vice president.

“Collectively, they put in over $1 million on the same day, and it’s no wonder…

“Prices are so cheap right now that the upside here is more than we’ve seen since early 2020.

“And obviously, the insiders, who know the most about the company, agree.

“This stock is an absolute bargain.”

Could be PacWest Bancorp (PACW), which owns Pacific Western Bank — they had insider buying along a pattern like that in early June, though in that case the insiders were buying the 7.75% perpetual preferred shares, not the common equity, and they bought as part of a public offering of those shares. You could buy those too, if you like, the preferreds are at PACWP — not much equity upside for the preferreds at $25 unless interest rates drop dramatically, but 7.75% is a pretty solid yield for a bank preferred. The common equity in the bank holding company (PACW) trades at about 90% of book value, and has a dividend yield of about 3.5%. The highest analyst target for PACW shares is indeed close to a 116% gain from where the stock has recently been, but not quite — the high target is about $51 now, and a 116% gain from the recent lows would mean they’d have to hit $56. Perhaps not ludicrous, the shares were in the $50s earlier this year, and the average target was $59 as recently as April, but you’ll have to make your own call there. Don’t rely at all on analyst price targets being chips you can cash, by the way, not ever — they react to the current share price more than they project the future trajectory, I’m only mentioning that since it was one of the clues. Analysts are pretty good at forecasting near-term earnings for a lot of companies, partly because the companies spoon feed them the data they need for their models and often provide pretty clear guidance, but they’re terrible at predicting what will happen to the share price over the next 12 months. (I’m no better at that, to be clear.)

Since the cluster was mostly buying preferred shares, and it was during an offering, I wouldn’t put too much weight on the timing of those purchases. Still, being a “regular” bank should be pretty decent these days, given the much-improved net interest margin they’re likely to be earning thanks to higher rates (they’re not paying out much to savers still, I’m sure… but they’re surely charging a lot more to borrowers than they did a year ago).

Other possible matches? EOG Resources (EOG) is pretty close, they often have big waves of insider buying, and including in early May, June and July… though from my skim through the Edgar filings, it looks like EOG’s Chief Accounting Officer (CAO) didn’t happen to buy on the same day as other insiders this time around. EOG is a big and reasonably valued oil company, concentrated in the Permian Basin and other major fields in Texas, and it’s mostly exposed to oil and other liquids, so it doesn’t look half bad at a single-digit forward PE, with a 3% dividend yield, but, of course, nobody knows where oil prices are going in the next year… so far, EOG this year has made a round trip from $90 in January to almost $150 in early June and back down below $100 recently.

And I’m sure there are others that might possibly fit, but the Thinkolator didn’t hit on any better matches for those few clues.

One more?

“The third has the most insider buying of all.

“Together, five major insiders have bought $47 million worth of shares since May.

“That level of confidence tells me they believe the stock is extremely undervalued.

“Recently, the company forecast significant core earnings for 2023…

“And analysts place the median 12-month price forecast at $70, nearly 200% above the stock’s current price…

“While the high forecast has it running as much as 800% higher on the next year.

“So I want to get this one out to folks as fast as possible.”

That sounds very much like one of the great punching bags in the market these days, the online car dealership Carvana (CVNA), famous for their flashy “car vending machine” properties but mostly existing as a virtual marketplace for auto dealers. There has been roughly $48 million of insider buying since mid-May, at prices in the low $20s, though 80% or more of that was from Ernest Garcia II, the father of CEO Ernest Garcia III. The elder Garcia also bought more than $500 million shares in April, as it was dropping from $160 to $80, and the Garcia family has been a bit of a lightning rod for controversy. They also were massive sellers last year — Ernest Garcia II sold something like $3 billion worth of his Carvana stake back in September, near the highs around $350.

Carvana is in survival mode at the moment, they’ve laid off a lot of people this spring and curtailed executive salaries to cut costs as used car demand has slowed up a bit from the frantic pace of the past couple years… but in a further match for Green’s pitch, they did also come out in May with guidance of “significant core earnings for 2023,” which is an oddly specific match. Maybe Ernest Garcia II and the other insiders do have a good handle on a fair buying price, since they were selling so heavily at $350 and buying aggressively at both $80 and $20 over the past couple months… maybe not. It’s your money, so you get to make the call. Carvana is hugely controversial right now and I can’t say that I’m all that interested in wading in to that bit of ugliness — I don’t know if there’s anything to all the short-seller’s allegations of fraud or intentional evil, but they sure got a lot of attention for selling cars without clean titles or registrations, and that’s surely put a bit of a dent in the brand they’re trying to build. Barron’s covered them a few weeks ago with the unflattering headline, “Carvana Sought to Disrupt Auto Sales. It Delivered Undriveable Cars.”

Who knows, maybe it has fallen far enough to be appealing — analysts have been cutting their price targets, but the median target was recently $70 (it’s now down to about $64), which would be a nice return from the current $22. Not such a nice return if you bought during the previous, much larger burst of insider buying at $80, so don’t let the signal of insider buying carry too much weight for you with this one… but well, it probably won’t go to zero. And I don’t know what they mean by “core earnings,” but if they make an actual honest-to-goodness profit in 2023, that would be a delightful surprise for analysts and investors, who see the company losing money at a rapid rate into the future… CVNA did have one profitable quarter, about a year ago when used cars were still selling for more than new cars, but since then the results have been looking progressively more feeble.

It’s always darkest just before the dawn, no? (OK, no, the darkness of night is quite uniform for the hours before our side of the earth rotates around to get a little touch of the sun again… but still, it’s a nice metaphor).

Anyway, that’s our quick look at some teased “insider buying” stocks — insiders buy for lots of reasons, but, on average, they mostly buy because they think their stock is worth owning… and it’s cheap enough to bet more on it.

Or, you know, that insiders have a lot of extra cash to throw around, and they want other investors to think that they think that it’s worth owning.

Insider buying is a more reliable positive signal than insider selling is negative, at least. Just remember to judge each opportunity on its own. Of those, you might be able to talk me into buying American Assets Trust, that looks like a reasonable and quiet little REIT, though it’s too similar to another of my holdings for me to get super excited… and PacWest is probably a decent bet among smallish banks, with a decent valuation, but I don’t follow enough banks closely enough to be very picky in that sector. Carvana is a dumpster fire and I can’t tell if it’s going to get put out or not, so that’s clearly the biggest upside potential… but is also also at much higher risk of falling another 90% from here. I’d guess that PACW has the best chance of doing unusually well over the next 90 days, since that’s Green’s timeframe for these teased insider picks, but that’s just because the earnings expectations next quarter look pretty low, and I’m surprised the banks aren’t holding up better in general, with net interest income growing so quickly (PACW actually reports this week, so that story could change quickly — AAT will report next week, and CVNA and EOG the week after that, in case you’re curious).

Want to follow any of those insiders? Have a better match for the clues than our friendly neighborhood Thinkolator? Let us know with a comment below.

P.S. Every time I write anything about Alexander Green, I get questions about his other long-running pitch for the “Single Stock Retirement Plan” (sometimes it’s a $4 stock, sometimes $3, depends on when they last updated the ad)… so I’ll throw that out to save you the asking: That “secret stock” remains, still, Hon Hai/Foxconn — I wrote our first solution to that teaser exactly four years ago today, coincidentally enough, and it has been updated a few times as the ad itself has gotten an occasional tweak… most recently here. Enjoy!