As the market moved steadily higher throughout the fourth quarter of 2011 and the first quarter of 2012, insider buying slowed to a crawl and eventually ground to a halt. That’s just how insiders operate. They like a bargain just like everyone else, and frankly, by the end of the first quarter, it was getting harder to spot verifiable bargains.

Of course, a slumping market is a sure-fire magnet to get these insiders to open up their checkbooks. And that’s precisely what’s going on. Since the start of May, roughly a month after the market began to pull back, insider-buying has surged. Right now, it’s common to find a half-dozen or more daily instances of at least $100,000 in fresh insider buying by a key executive. 

#-ad_banner-#Yet you shouldn’t necessarily follow their lead and take their actions as a buy signal. After all, insiders are notoriously bad market-timers, and their buying often comes before even deeper drops ahead. Instead, I use insider-buying signals for long-term investment ideas, but almost never as a short-term trade. 

I do look to insider-buying signals when I’m bearish on a stock. Fresh buying, after a stock has fallen substantially, may signal that the opportunity on the short side has already been fulfilled. For example, Netflix’s (Nasdaq: NFLX) Jay Hoag, a company director, has bought a hefty $25 million in company stock in recent days at an average price of around $73 a share. 

I thought Netflix was overvalued in early March when it traded for $113 a share, and I still thought it was overvalued in late April when it had plunged to $86. I still think this company’s upcoming challenges have yet to be factored into the stock price, but a move down to $70 — along with that inside buying — would make me cover a short position if I had one in place.

Here are three other stocks with recent insider buying that are worthy of more research:

1. Merge Healthcare (Nasdaq: MRGE)
This provider of digitized medical-imaging services has fallen by two-thirds from its 52-week high, taking a final sharp blow in early May when management announced that sales growth would slow this year. In response, six insiders have recently bought nearly $1 million in stock (on a collective basis), and this move could pay off handsomely because this stock looks quite oversold. 

Merge is well-positioned to handle the ongoing shift in the health care sector away from written medical records to electronic medical records. The company’s software works with all of the major health care information technology (IT) providers’ systems, and by all indications, sales should again be rising at a sustained double-digit pace in 2013 and beyond.

2. Geeknet (Nasdaq: GKNT)
Straight away, I’d caution that this is a thinly-traded micro-cap, so it comes with its own set of risks. Geeknet recently decided to shed one of its two business lines, which could unlock real value. For a number of years, Geeknet worked to be a major player in the world of tech websites, operating sites such as Slashdot (an IT newsblog) and Freecode (which distributes Linux code and other software). Trouble is, there were never really big profits to be made from these sites. Now, management wants to unload those sites to better focus on a burgeoning e-commerce business.

This company’s eponymous website, ThinkGeek.com, carries a wide range of unique tech gadgets, many of which are exclusive to the company and are often hot-selling gifts during the holidays. Sales in this business rose 50% in 2010, another 30% in 2011 and could rise another 15% to 20% this year to about $140 million. 

Insiders, led by Chairman Ken Langone (who co-founded Home Depot NYSE: HD)), have been steadily buying small clusters of stock since February, picking up more stock late last week after the company announced plans to seek a buyer for the various websites. 

Beyond the growth metrics noted above, this is also a value play. Net cash of $32 million accounts for more than one-third if the stock price. If you back that out, then the price-to-sales ratio for this e-commerce play is less than 0.5 (said another way, every dollar of stock you pay for gets you 50 cents in sales).

3. Vocus (Nasdaq: VOCS)
Vocus helps corporate clients manage their online marketing efforts using search, social media and other tools. In late February, this company made a bold acquisition — and shares got crushed as investors realized the deal would hurt profits now but boost them later. A decision to buy iContact, an e-mail marketing firm, for $169 million is expected to help Vocus offer an even wider array of integrated marketing tools. 

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Still, management conceded that the deal would lead to much lower near-term profits as expenses build in support of a larger sales force. Full-year earnings forecasts fell by half or more, and Vocus is now expected to earn roughly $0.40 a share this year (down from $0.81 in 2010) and about $0.65 in 2013. Though shares have fallen from $34 to $15 during the past year, they may not look like a deep bargain on a price to earnings (P/E) basis, but a group of five insiders recently bought more than $1 million in stock (collectively) at an average price of around $16. That surely makes this stock worthy of further research. 

Risks to Consider: As noted above, insiders are notoriously poor market-timers, and these stocks could fall even more if the market stumbles badly. Don’t confuse insider stocks with value stocks.

Action to Take –> Insiders have a much better track record if you have a one to two-year time horizon. Their buying often comes at a time when a company is in transition, as is the case with these four stocks noted above, and it often takes several quarters for that transition to play out. Still, they could turn out to be great pickups for your portfolio.

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