DISCLOSURE: Readers should assume that all stocks mentioned in this column are owned by the author and/or his firm unless otherwise noted.

Insiders tend to be early, but they tend to be right. That mantra has served my portfolio well through the years, and it’s why I use insider data as a first screen to determine where I should focus my research time.

As CPA Insider™ readers well know, market insiders aren’t always right, of course. And I sometimes find myself questioning what the line is between insiders being so early that they’re wrong. That is certainly a valid question regarding insiders’ wholesale buying in the still out-of-favor financial services sector for most of this year. Fundamentals and technicals are still keeping me very underweight in this sector despite the insider signal, but anyone with a long-term view (and I mean a Buffett-like long-term view, not just six to 12 months) can justify getting in now.

But financials aren’t the only stocks on the ropes now. Small-cap biotech and medical device firms have been hit particularly hard as well. Though seemingly unrelated to the sub-slime mess, the lagging of these types of stocks springs directly from the move away from risk that the credit crisis has understandably caused. Like the financials, insiders are buying noticeably in the small-cap medical names too.

Following are two such stocks: NMT Medical (NASDAQ: NMTI), and Gene Logic (NASDAQ: GLGC). The question of insiders being early or wrong is specifically relevant to both. I have bets along with insiders and lost on NMTI and GLGC in the past, but am now trying both of these speculative stocks back on for size again after their particularly large sell-offs.

NMT Medical (NASDAQ: NMTI)

I made my unsuccessful play on NMTI in April of 2006, when insiders last bought a big dip in the stock. Starkly illustrating the risk, NMTI is now more than half off the point at which I took my quick hit then. Yet, the payoff of future positive clinical data remains intriguing. The stock spurted from $4 to $20 in 2005, when the company last had a bullish bout of news flow.

NMT is a medical device firm that makes implants to treat cardiac sources of migraine headaches, stroke and other potential brain attacks. It is a development-stage company that is not expected to break into profitability anytime soon. So this stock will continue to move on news flow.

Human fetuses have a small opening in their atrial wall that allows the mother’s oxygenated blood to support it. This opening is called a patent foramen ovale (PFO), and it usually seals itself by age one. But that is not always the case. Studies have suggested that patients who have an unsealed PFO may suffer from severe migraines, and be more inclined to have strokes. But NMT’s STARFlex and BioSTAR products have promise to correct such heart defects.

Judging by NMTI’s price chart, however, this promise continues to develop far too slowly for investors. Yet, at some point, I believe insiders will be proven correct to have bought their stock’s dips. I further view the firm’s cash and sales metrics as offering reasonable value to make another
bet on NMTI.

The firm still has $33 million in cash with which to fund research and development (R&D). That equals $2.60 per share as of last quarter. While admittedly dwindling, cash burn should be able to support R&D efforts for at least another two years.

NMT also has real sales. Its stock even trades at a reasonable trailing price-to-sales ratio of 2.6. While sales growth has not been growing in a smooth trend, they have been stable, and the result of both royalties and
product sales.

Not surprisingly, insiders are once again buying into NMTI as investors bail from this and other biotechs in this cruddy market environment. And as a result of the industry’s out-of-favor status right now, investors can also get into NMTI cheaper than insider have recently. Since August, the firm’s CEO and CFO purchased a total of $246,850.

Gene Logic (NASDAQ: GLGC)

Shares of Gene Logic actually soared over 25 percent several weeks ago, and on decent volume too. Even so, the company still trades for just over the cash it has in the bank.

GLGC took an ounce of flesh from me two years ago when I last tried to speculate on it. The strong insider signal and the firm’s cash are keeping us from being “twice shy” about trying my luck again. There is no sugar coating GLGC, however. It remains a very speculative play despite its cash. It is also a speculation that insiders themselves have not made money on in the past few years. While many executives were smart enough to sell this stock when it traded for over $100 back in 2000, they started betting on a bottom far too soon.

Insider buying has been prevalent since mid-2004 to the present. Most of the activity since 2004 has represented a sad averaging down in price for insiders. But last week’s purchases included a welcome bout of buying into strength. During the week ending November 30, six insiders at GLGC purchased $223K worth of the stock at prices ranging from $0.79 to $0.95.

Most interesting of the purchasers was CEO Charles Dimmler. He was one of the smart sellers back in 2000, but also one of the early buyers in recent years. He appears much more adamant about GLGC being near a bottom now, however. His buying binge last week increased his total direct holding by over 350 percent.

The bet that insiders and we are making is that the firm’s transition from a genomics firm to one focused on drug repositioning and development with deep-pocketed partners can curtail the cash burn at this perennially loss-making company. A major move in this transition is just underway. It involves the sale of Gene Logic’s genomics division for $10 million. While this stagnant division still generates the bulk of the firm’s present revenues, it is also generating most of the company’s losses. Jettisoning it can’t hurt the bottom line, while the cash from the sale can’t help but support the stock during the transition.

The cash cushion Gene Logic has is a critical difference between investing in its shares rather than most of the other apparent bargains insiders have been buying recently. That certainly includes the startling number of large and small financial stocks that have come through our screens in recent months. Gene Logic may have a similar volume of unknowns with its operations going forward. But at least management has already faced its failures, and developed a new path. And its cash, though dwindling, gives more comfort that a bottom can be logically expected than do the iffy assets of financials.

That said, GLGC fell to 25 percent below cash on hand just last month. This shows that the bottom for this stock — should the market come apart further — is only related to its cash levels, not limited specifically by it.

Jonathan Moreland is the Director of Research at New York-based Insider Insights.com. Click here for a FREE trial issue of the firm's weekly newsletter Insider Insights.