What are we looking for?
Stocks that appeal to both Bay Street analysts and corporate insiders.
There is no one better positioned to assess the prospects of a company and, arguably, the potential of its stock than its own managers and directors. For that reason, strong insider buying is often considered a bullish signal.
Combine insider buying with strong support among analysts, and you have a double endorsement from some well-informed sources.
How did we do it?
We first limited the search to companies on the Toronto Stock Exchange of considerable size. Minimum market capitalization was set at $500-million.
Next, we screened for stocks that satisfied one of two conditions for corporate buying: either a minimum of $100,000 in insider buying over the past two months, or a volume of insider buying of at least 0.01 per cent of the total trading volume over the same period.
Next, we looked for stocks that are also held in high regard by sell-side analysts. We filtered out stocks that had fewer than four analysts following them to avoid being skewed by too few strong opinions. Then we looked at the average rating as calculated by Bloomberg on a scale of one to five, where one indicates "strong sell" and five indicates "strong buy." Eligible stocks needed to have a score of 3.5 or higher.
What did we find?
There are 17 Canadian-listed stocks that had our required double vote of confidence.
Most of these stocks are significantly off their 52-week highs, which corresponds to the idea that insider buying is a signal that a stock might be undervalued.
On that note, the sectors most heavily represented in our list are energy, industrials and financials, which are also among the worst performers of the S&P/TSX composite index over the last two months.
While combined insider and analyst support might be a good starting point in identifying stocks due for a spike, further research should be conducted before making any investment decisions.