2 Ways You Could Have Identified NVIDIA Stock as a Potentially Huge Winner Before It Soared

NVIDIA (NASDAQ: NVDA) stock has been red-hot. Shares of the graphics-chip specialist have returned 450% since the start of 2016, and 68.2% so far in 2017 through Friday, Sept. 22. The S&P 500 has returned 28% and 13.4%, respectively, over these periods.

When you see returns like this, one thought that likely comes to your mind is: How might I have spotted this stock as a potentially big winner before it went ballistic?

To be clear, I think NVIDIA still looks attractive as a long-term investment. Its graphics processing units (GPUs) have become favored for providing processing power for deep learning, a burgeoning niche within artificial intelligence (AI). It seems unlikely, however, that investors will see another five-plus-fold increase in less than two years.

Below are two ways that you could have spotted NVIDIA stock as a potentially promising investment before it took off.

1. By following insider buying

You could have identified NVIDIA as a stock that might soon take off by noting a big surge in insider buying, with "insiders" including a company's senior officers and directors, and individuals or entities that own 10% or more of a company's voting shares. (I'm not talking about the illegal kind of insider buying here.) Insiders usually have a significantly better picture of a company's near and intermediate term prospects than even the most savvy non-insider investors.

There will always be peaks and valleys in insider buying and selling for various reasons, some of which might not be meaningful. But you should pay close attention to an insider-buying spike of the magnitude of the one that occurred in NVIDIA stock in late March 2016.

You can see in the chart below that the spike in buying led to an increase in the total shares owned by insiders and the percentage of total shares that insiders collectively own. (Yes, both metrics have come back down -- it's only natural that some insiders would take some quick profits.)

The following chart shows that NVIDIA stock began its big surge in May 2016, soon after the huge spike in insider buying. The initial impetus for the stock's big rise was the release of the company's fiscal Q1 2017 earnings in May 2016. Driven largely by deep-learning applications, earnings growth significantly accelerated in the quarter, with earnings per share jumping 38% and adjusted EPS soaring 39%.

I'm not advocating buying a stock based solely upon data like this, but rather using this type of data in one of two ways. First, you should periodically check insider buying and selling for your watch list candidates. A surge in insider buying might convince you to pull the buy trigger on a stock you're following. Second, you might come across insider buying data for a stock that you know nothing or little about. In this case, that data might pique your interest enough to explore the company behind the stock.

2. By being well read within the broad tech space 

NVIDIA's stock surge since early 2016 is largely due to the company's transformation from a company heavily focused on supplying graphics cards for the gaming and professional visualization markets into one that's also a notable player in artificial intelligence, specifically in its data center and auto businesses.

You could have learned that NVIDIA was moving into AI in several ways, including by reading MIT Technology Review's annual list of the world's "50 Smartest Companies." These companies "best combine innovative technology with an effective business model," according to the prestigious tech publication. Yes, that does sound like a winning combo for a top-performing stock, one reason why this annual ranking is worth perusing.

NVIDIA has been steadily climbing the rankings of this list -- from No. 28 in its inaugural appearance in 2015 to No. 12 in 2016 to No.1 in 2017. Seeing NVIDIA mentioned positively for its move into AI -- which promises to be a massive trend -- and moving up in the "smartest" rankings of a well-regarded tech-focused publication might have led you to explore NVIDIA as a potential investment.

Here's the return picture if had you invested in NVIDIA stock on the same day in June 2015 that the "50 Smartest Companies" list for 2015 was published.

Here's the picture if you had invested in NVIDIA stock on the same day in June 2016 that the 2016 "smartest" list was published.

And your return would be 22.2% if you had invested in NVIDIA stock on the same day in June of this year that the 2017 "smartest" list -- with NVIDIA at No. 1 -- was published. The S&P 500 returned 3.9% over this period.

Wrapping it up

Following insider buying can be one tool in helping you to identify potentially attractive stock investments. Keeping well read in the space or spaces within the stock market you're most interested in should also help your investing.

At the risk of sounding like a cheesy infomercial, there was a third way you could have spotted NVIDIA as a potentially promising investment -- by subscribing to one of The Motley Fool's subscription services. NVIDIA stock is a recommended "buy" in several of the services, with a couple "buys" dating back quite a while.

Beth McKenna owns shares of Nvidia. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool has a disclosure policy.