3 Small-Cap Stocks With Heavy Insider Buying

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Sterman

NEW YORK ( StreetAuthority) -- Regular readers of my articles know that I spend most of my time in search of undervalued mid-sized and large companies. There are so many bargains in the S&P 500 alone, that it simply hasn't paid to spend too much time on small -- and risky -- stocks in recent quarters. Yet every portfolio needs a broad cross-section of holdings if it is to beat the market. This means you should hold a basket of micro-cap and small-cap stocks alongside your blue-chip holdings. To mitigate the risk that these small companies stumble badly, it pays to get a vote of confidence that business is solid. These smaller companies, all trading below $4, have all seen such a vote of confidence in the form of notable levels of insider buying.

1. Harris & Harris (TINY)

Recent price: $3.84

This investment firm takes stakes in a wide range of privately-held technology companies that cater to the biotech and industrial sectors. The portfolio companies often seek to commercialize nanotechnologies, which are processes that yield miniaturized lubricants, materials and other industrial goods.

The market rout of last summer was hard on this speculative stock, as its shares fell from $5.50 to below $4. They've stayed out of favor ever since. In fact, shares stood at $25 a decade ago.

Investors are clearly shunning hard-to-value stocks like this one. In response, management has been conducting an increasing number of "liquidity-inducing events," by which some or all of the holding is sold off. Harris & Harris had five such events in 2011 (after zero in 2010), and recent management comments imply plans for five or six portfolio sales in 2012 as well.

The value of Harris & Harris' holdings equal $4.38 a share, meaning you can own the basket of companies at a 12% discount to the current stock price. With shares below $4, nearly a dozen insiders have acquired a combined 31,000 shares since the middle of November, worth more than $100,000.

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