Why a surge of insider stock buying may not be so bullish
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Used to be, when a company’s chief executive was buying the stock for his own account, investors considered that a sign that the shares were really cheap and were poised to rise.
But in this bear market, buying by CEOs and other insiders has become a contrarian indicator, according to some analysts who track insider activity.
From Bloomberg News:
General Electric Co. CEO Jeffrey Immelt and Citigroup Inc.’s Vikram Pandit are back to buying their own companies’ shares. That means there may be more stock declines to come. Insider buying, a bullish signal for two decades, lost its prescience this year and now may be a harbinger of a retreat in shares because it signals overconfidence, according to Ben Silverman, director of research at InsiderScore.com, a stock tracking firm in Princeton, N.J. ‘Everyone’s drinking the Kool-Aid,’ said Michael Levine, a money manager at New York-based OppenheimerFunds Inc., which oversees $160 billion. ‘These guys know their companies better than the market, so they think they’ll be right. But the economic slowdown has happened much more quickly and has been much deeper than people expected.’
Insiders normally acquire much or most of their shares via options rather than open-market purchases, so insider stock sales in any given month (including sales of shares purchased by exercising options) normally swamp open-market purchases. When the latter begins to climb, it shows insiders believe they’re getting a bargain at the market price.
The Bloomberg story notes that insiders boosted their share purchases in the last four months, buying $57 worth of stock for every $100 sold in October, from $21 bought for every $100 sold in June. The last time the amount of buying increased as much was in March, when executives bought $62 of shares for every $100 they sold.
The upshot is that insider buyers were too early in March, and they were too early again in recent months, as stocks have fallen off a cliff.
The story also notes that insiders at some financial companies, including Washington Mutual Inc. and Wachovia Corp., were big buyers in August 2007, during the first market swoon tied to the then-developing credit crisis.
Washington Mutual shares now are virtually worthless. Wachovia, which has agreed to sell itself to Wells Fargo & Co., is down 89% since August 2007.
From Bloomberg:
‘Recent history isn’t on their [insiders’] side,’ said Silverman, whose firm tracks insider transactions for more than 325 institutional investors. ‘We saw in financials last year people fooled by their own imagination. Whether it was hubris or being too close, not being able to see the forest for the trees.’