INSIDERS PROFIT HANDSOMELY FROM their purchases, but not at all from their sales. That conclusion was reached in January 1999 by researchers at Harvard University. Their study supposed that shares bought by insiders — company's executives, directors and major shareholders — between 1975 and 1996 were placed in a portfolio and held for one year. (Hence, transactions were weighted for size.) Sales were placed in a separate portfolio.

The findings: The purchase portfolio produced "abnormal" returns — those that exceeded broader market movements — of 0.4 percentage points per month. The sale portfolio earned no abnormal returns. Interestingly, the study found that just one-sixth of abnormal returns earned in the purchase portfolio accrued within the first five days, and just one-third accrued within the first month. 

That suggests that the success of insider investors is more than a horse-drawing-the-cart phenomenon. That is, while the stocks they buy may get an initial boost from the attention the purchases themselves create, they appear to do well for months afterward, too.

Our insider-buying stock screen has turned up some impressive results of its own. In January 2004 it produced film studio Lions Gate Entertainment (LGF), which we featured in a story ("These Lions Are About to Roar"). Three of its executives had recently ponied up a total of more than $1 million for shares. The stock is now up 90% since our story vs. 3% for the Standard & Poor's 500 index.

Our insider-buying screen criteria are few. We scan our 8,000-company database for the largest insider buys in terms of dollars spent over the past six weeks among companies that share three characteristics. They all have trailing 12-month sales of more than $200 million and average daily stock-trading volume of more than 100,000 shares. And their stocks' price/earnings ratios are in their industry's bottom quartile.

Use our stock screener anytime to run the search for yourself. Recently it produced a list of 15 companies. Let's look at one of them.