Pace of Insider Buys May Signal a New Bull Market
To many smart Wall Streeters, there are more reasons to expect a plunge in stock prices soon than a wild advance. But you can’t find many bears among the executives running the nation’s major companies. They are buying shares in their own firms at a pace rarely seen in history.
The Insiders newsletter of Ft. Lauderdale, Fla., says the current insider buying wave has been exceeded only twice in 15 years: In 1974, during the depths of that year’s bear market; and in late-1987, immediately after the market crash.
Both of those buying binges were right on the money, preceding strong market rebounds.
Currently, the newsletter’s five-week “insider indicator” reads 63%. That means 63% of all insider transactions over the past five weeks were purchases, while only 37% were sales. The data come from reports that insiders--mostly corporate officers and directors--must file with the Securities and Exchange Commission.
The indicator measures open-market transactions only, not discounted stock option purchases. So the insiders are paying full market prices for their companies’ shares.
Norman Fosback, editor of The Insiders and a veteran market watcher, describes the buying surge as a “rampantly bullish” signal for the market. “It must reflect a belief by insiders that their stocks are undervalued,” he said.
In theory, corporate officers ought to know best how attractive their firms’ shares are at any given point. They are, after all, running the businesses. And over the past 15 years, their record of buying low and selling high has been unarguably good.
For example, insiders bought heavily just before the bull market was born in 1982. They sold heavily in mid-1983, as the market temporarily topped. And they were heavy buyers again late in 1985, just before stocks exploded higher.
But insiders aren’t infallible, Fosback admits. “Many of them bought way too early in 1974, as the market was crashing,” he said. Insiders also “show a tendency to unload early” when stocks are in an up trend, said Juan Noble, editor of Vickers Weekly Insiders Report in New York. However, that wasn’t true in 1987, to the insiders’ detriment: They weren’t big sellers before the crash, so they clearly didn’t see it coming.
Still, Noble insists that you don’t have to watch the insiders for long to become a believer in their collective wisdom.
Could something be skewing insiders’ view of their own stocks? Perhaps. The insiders may be too confident in their stocks simply because they’ve made so much money in them since 1982. Or they may be taking a far longer-term view of their stocks than other investors would be willing to do.
For now, though, Fosback and Noble say they’d rather bet with the insiders than against them.
High on Allergan: A good example of heavy insider buying is Irvine-based Allergan Inc., the eye- and skin-care products company spun off from drug giant SmithKline Beckman last July.
In late January, seven Allergan executives added significantly to their stakes. The buyers included Chairman Gavin S. Herbert and President William C. Shepherd. Most of the purchases were at $13.50 to $13.75 a share. Allergan has risen since, to $15.125 Tuesday.
The insider buying followed the company’s release of fourth-quarter results, which included a $22.8-million charge to exit some marginal product lines and trim jobs. Allergan, which earned $1.04 a share last year on sales of $807 million, is facing a weak contact lens market and has been working to streamline operations and raise productivity to put profits back on track. With the stock purchases, the officers are betting their own cash that they’ll succeed.
Jeff D’Eliscu, Allergan’s investor relations officer, said Allergan officers “didn’t have a lot of incentive to own SmithKline Beckman stock” in the 1980s, given its relatively dismal performance. They clearly have a different view of what they can accomplish on their own.
Will Frankfurt Be Tokyo II? The West German stock market, which has rocketed to new heights since the Berlin Wall fell last autumn, stumbled badly Monday and Tuesday.
The Frankfurt exchange’s DAX index suffered a 23.98-point, 1.2% loss Monday, and fell 25.35 points to 1,898.51, or another 1.3%, Tuesday.
The culprit: Worries about repercussions from the impending economic union of West and East Germany. The big concern is that West Germany’s conversion of East German marks to West German marks will cause massive inflation if East Germans go on a spending spree.
Few people in the world are as paranoid about inflation as the Germans. While the West German government wrestles with how many marks to give the East, the West German central bank has insisted that it will do whatever is necessary to keep inflation from surging. Translation: German interest rates, already high, may be driven even higher by the Bundesbank if that’s what it takes to keep the economy from overheating.
And that sounds eerily like a rerun of Japan’s situation, where the central bank has raised rates sharply over the past year, leading to the Tokyo market’s plunge in the first quarter.
Is it time to sell German stocks? John Hickling, who runs the Fidelity International Growth and Income stock mutual fund, advises “a little caution short term” because the German market appears overdue for a correction. But he believes that the Bundesbank’s resolve is exactly what will keep stock prices from tanking. If the Japanese had acted sooner to contain inflation worries, the Tokyo market might never have crumbled in despair and confusion, many experts say.
West German stocks, despite their recent gains, still are relatively cheap versus earnings, analysts say--unlike Tokyo’s story. And it’s important to remember that West Germany will be the prime beneficiary if Eastern Europe’s blossoming produces an economic boom in the 1990s, as expected.
“German companies that were looking for 2% annual real growth over the 1990s now are looking at 8% to 10% real growth,” said Frank Jennings, who runs American International Group’s $500-million international investment portfolio. With those kinds of numbers, it’s unlikely that investors worldwide will let German stocks go into a free fall before buying interest returns in force.
