Three Ways to Follow the Smart Money

Monitoring insider buying is a great way to determine how those who run a company truly feel about its prospects. When a company insider lays down his own money to buy shares in his company at market prices, chances are that there is a very good reason. 

Company insiders have intimate knowledge of how their particular business operates. They know when sales are likely to rise. They know about a new marketing strategy that could boost the company's bottom line. They know about industry conditions that may be changing for the better. And they know the company's balance sheet like the back of their hands.

A company insider might sell shares for any number of reasons. He or she might need cash for a major purchase or decide to donate a lump sum to charity (yes, this has happened). So an insider selling shares does not necessarily mean bad news for the stock in question.

However, an insider will buy shares of his own company for only one reason: He thinks the stock is set to make him money. There is "no better tip-off to the probable success of a stock" than insider buying, according to Peter Lynch. We couldn't agree more. That's why we're always monitoring insiders' buying trends.

Here are three names that have recently come up on our radar:

First up is ViroPharma (VPHM: NASDAQ). ViroPharma's shares were battered in February when the company announced it did not achieve its desired endpoints with a Phase 3 trial for a treatment for cytomegalovirus.

After the announcement and subsequent drop in share price, four different insiders purchased VPHM stock for $3.97�4.79 per share.

Next up is Evergreen Energy Inc. (EEE: NYSEArca). As shares sank to new lows between 30�40 cents, 10 insiders bought in. A few days later, Evergreen announced an agreement with Sumitomo Corp. to advance their joint K-Fuel project in Indonesia. The announcement sent shares soaring ― the stock rose more than 100% just days after the announcement.

Of course, there was no way to know about the lucrative K-Fuel deal ― unless you were a company insider with access to this kind of information. But thanks to Securities and Exchange Commission filings, we can keep tabs on insiders' buys and sells…

The good news in late January has helped make EEE one of the few bright spots on the NYSE…shares of EEE are up 135% on the year (although the stock plummeted much of the latter half of '08).

Our final insider buying alert is Mad Catz Interactive Inc. (MCZ: AMEX). This stock is down roughly 40% so far this year, with its biggest drop occurring on Feb. 12, after posting poor third-quarter results.

What do these company insiders know about Mad Catz that we don't? Only time will tell…