Insider Buying Rush Is On
Damn the bears, full speed ahead!
That’s pretty much the motto of a lot of corporate insiders today, at least where their stocks are concerned. While the market continues to sink, executives and directors are in there avidly buying their own companies’ stocks for their personal portfolios. They apparently think they’re getting great bargains.
The Insiders newsletter of Fort Lauderdale, Fla., tracks open-market insider transactions via the officers’ required filings with the Securities and Exchange Commission. Editor Norman Fosback says a “flash” index of insider maneuvers shows 77% of their stock transactions over the past 30 days have been purchases, and only 23% have been sales.
The buying spree appears to be accelerating: A reading over the last 20 days alone shows 84% purchases, Fosback says. That’s getting close to the record-high 89% flash index reading recorded immediately after the October 1987 market crash, he says.
Historically, the insiders have had a pretty good sense of when to buy and sell their own stocks. That’s what you’d expect, given that they ought to know best how prospects look for their companies. But Fosback notes that insiders aren’t infallible, and they’re often early. They were wildly bullish all during the market plunge of 1974, not just at the bottom. And they bought heavily early in 1982, well before the market bottomed that August.
What’s more, buying by insiders in one industry group--banking--has been extremely strong for the past year, even as the stocks have sunk ever lower each month, Fosback notes. The banking industry has an “Insider Rating” of 6.9, highest of all industry groups on Fosback’s 1-to-10 rating scale, with 10 being rampant insider bullishness. The system is based on a weighting of insider purchases versus sales over the last year, and also factors in the importance of the executives involved, among other things.
“I’ve never noticed such concerted buying in any one industry like this,” he says of the banks, also noting that S&L; executives too have been major buyers of their own shares. Yet the bank and S&L; stocks’ dismal performance in the face of that buying has been “discouraging,” Fosback says. It suggests that the insiders have just been plain wrong, in this case, to be so optimistic.
“Perhaps the complexity of the banking and S&L; industries is such that the insiders don’t understand the real value of their stocks anymore,” Fosback says.
Insiders at CalFed, parent of California Federal Bank, proved to be good timers early in 1984, when they bought shortly before the stock tripled. Now they’re buying heavily again.
Seven CalFed officers and directors boosted their holdings substantially in late July and early August. They included Chairman Jerry St. Dennis, who bought 5,000 shares on July 31 for $10.375 apiece, raising his total to 17,224 shares. At that point, the stock was already off 64% from its 1989 peak of $28.50.
But Friday, CalFed stock closed at $6.875, down $1.125 for the day, as investors continued to mercilessly sell financial stocks.
Insiders at other finance and real estate firms also have bought into their slumping shares, to little avail so far:
* At Security Pacific Corp., Vice Chairman David Lovejoy bought 5,000 shares on Aug. 24 at $26.375 apiece, raising his stake to 36,912 shares. And Nicholas Binkley, president of the company’s Financial Services System unit, added 1,400 shares to his holdings on Aug. 29 at $27.625 each. The stock now is at $26.
* At Del Webb Corp., a major developer of retirement communities in the West, Controller John A. Spencer picked up 2,000 Webb shares on Aug. 16 for $6.375 each. He bought 2,000 more shortly afterward, for $5 each. The stock now is at $6.25. It was as high as $15.75 in 1989.
“The stock price got to the point of being ridiculous,” Spencer says. The real estate market’s short-term slide notwithstanding, he says, “We’re extremely confident about our company.”
It may well turn out that the insiders have been right to be so bullish. A few years from now, assuming that the banking and real estate industries recover, those stocks could be double or triple where they are today.
But as in the past, it also may be that insiders are too early, across the board. And in the worst case, they may be viewing their businesses less with special insight than with a hopefulness based on pure emotion instead of fact.
Briefly: The market may have been preordained to plunge this year, according to some chart work done by Ralph Acampora, technical analyst at Prudential-Bache Securities. He notes that the Dow Jones industrial average reached major bottoms every four years consistently from 1962 to 1986. The years 1974 and 1982 provided the most memorable bottoms in that sequence of four-year cycles. You have to look at the 1987 crash as an aberration to entirely buy this cycle, but it’s interesting anyway. . . . With the departure of bullish market strategist John Connolly, Dean Witter Reynolds has cut its recommended “balanced account” portfolio weighting to 60% stocks, from 70%. The firm raised the bond weighting to 30% from 20% and kept cash at 10%.
INSIDER TRENDS
Industries where corporate insiders have been buying their own stocks most heavily, and least, lately. A rating of 10 is best, 5 is neutral and 0 is worst.
Heavy Buying Group: Rating Banking: 6.9 Finance: 6.4 Distillers/brewers: 6.4 Real estate trusts: 6.1 Insurance: 5.8
Little Buying Group: Rating Cosmetics: 4.1 Movies/sports: 4.2 Computers: 4.4 Packaged foods: 4.4 Health services: 4.5
Source: The Insiders newsletter
