Stock buys by insiders a good omen?
Top corporate insiders last month bought more of their companies’ shares than they sold for the first time since 1995, suggesting to some analysts that the beaten-down stock market is poised to rally for the rest of the year.
Although directors and top executives stepped up buying, however, so-called short sellers were betting against U.S. companies like never before.
The seven previous times in the last 20 years that insiders bought more than they sold, the Standard & Poor’s 500 index rallied an average of 21% in the next 12 months, according to Bethesda, Md.-based Washington Service, a firm that tracks Securities and Exchange Commission filings by insiders about their transactions in their companies’ own stocks.
The net purchases could indicate executives believe the worst may be over after stocks suffered their biggest January drop in 18 years on signs that a recession was approaching or had already started.
“If it’s so bad, how come these guys are gobbling up their own companies’ stock? That’s the telltale indicator,” said Fritz Meyer, 57, a Denver-based senior market strategist at AIM Advisors Inc. “Companies are in the best possible position to assess the economic outlook.”
Purchases by corporate insiders at the 1,911 companies whose stocks are traded on the New York Stock Exchange reached $683 million in January, or 1.44 times the amount of insider stock sales.
Meanwhile, the volume of shares sold short last month grew to 3.7% of NYSE-traded companies’ total shares outstanding, the highest level since at least 1931.
Short sellers are traders who sell borrowed shares in the belief that they will pay a lower price to buy shares to pay back the debt.
Executives and directors who bought their companies’ stock could be underestimating the effect of the economic slowdown on earnings, said Robin Hepworth, a London-based money manager at Allchurches Investment Management Services. Insiders “are being very brave,” Hepworth said. “Against the backdrop of everything going on, this is one positive.”
