Insiders Take Bullish View of Stocks They Know Best
Wall Street’s surprising rally so far this year has been fueled in part by a group of buyers with historically sharp timing: Corporate insiders.
American executives have on balance been buying their own companies’ shares, while eschewing selling, even as the market overall has zoomed.
The insiders’ appetite for stocks suggests that they still see decent value in the market, at least insofar as it appears in the stocks they know best--their own.
“Insiders look bullish,” says Robert Gabele, editor of CDA Investnet Insiders’ Chronicle newsletter in Ft. Lauderdale, Fla.
Executives’ purchases and sales of their companies’ shares can be tracked through records that all key insiders must file with the Securities and Exchange Commission, detailing their transactions.
Those transactions can be separated into two types: option-related purchases and sales, for shares that are granted to executives at often below-market prices; and open-market transactions, whereby insiders buy (and sell) at the same market prices that ordinary investors would get.
Naturally, open-market purchases are considered a more significant indicator of executives’ enthusiasm for their shares than option-related purchases. And in recent months, open-market buying has markedly outpaced selling:
* Insiders reporting open-market purchases totaled 2,049 in the five weeks ended Feb. 3, compared to 1,486 reporting sales, according to The Insiders newsletter, also based in Ft. Lauderdale.
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That means 58% of reported trades were purchases, the highest for any five-week period since early 1991--just before the stock market exploded higher in the wake of the Allies’ victory in the Gulf War.
* As of last Friday, the newsletter’s five-week indicator of reported trades had slipped to 55% purchases, still a bullish reading. In late 1993, in contrast, the index was at just 30% purchases.
* An index of actual open-market trades by insiders over the previous 30 days reached 61% purchases two weeks ago, according to The Insiders letter. The actual-trade index removes trades that were reported in the period but that occurred perhaps months earlier. (Though the SEC requires trades to be reported within a specified time period, some insiders are notoriously tardy with their filings.)
The latest reading of that “flash” actual-trades index was 47% purchases as of Friday, suggesting some slowing of insider buying as the market has hit new highs.
Even so, analyst George Shirk at The Insiders says that until executives revert convincingly to selling, “the odds favor a continuation” of Wall Street’s rally.
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The simple idea behind tracking insider transactions is that they should know better than outsiders how positive, or negative, their companies’ prospects are in the near term. In theory, at least, insiders are more likely to buy their stocks on the open market when they believe the shares’ prices are cheap relative to upcoming earnings growth.
Likewise, insiders are more likely to be heavy sellers of their own shares when they believe prices are too high relative to near-term prospects.
Of course, insiders aren’t infallible, either individually or in group behavior. For example, they were buying aggressively in mid-1990, just before the market plunged with Iraq’s invasion of Kuwait.
On the other hand, their general reluctance to buy in late 1993 seemed to anticipate the Federal Reserve Board’s decision to tighten credit in February of last year, which sparked the worst market selloff since 1990.
Gabele, of the Insiders’ Chronicle letter, believes that the preponderance of executive buyers in recent months reflects the deep declines suffered by many stocks last fall, even though broad market indexes held up reasonably well.
“A lot of stocks were way down in 1994. Insiders react to that,” Gabele says.
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Still, he notes that the absolute level of insider transactions--purchases and sales--so far this year has been well below year-ago levels.
Gabele also cautions that the relative dearth of selling by insiders this year could be related to expectations that Congress will pass a capital-gains tax cut in 1995. Because it’s not clear what effective date Congress might set for such a tax cut, many insiders could be waiting for more guidance before deciding to unload a substantial amount of stock at a profit.
“Insiders who are looking to sell will frequently hold off if they feel a ‘trigger event’ is coming,” Gabele says.
That could mean that some of the selling that might have occurred in recent months will be pushed into spring or summer, if Congress acts on the capital-gains issue, or if insiders begin to give up on the idea, he says.
For now, however, Gabele says he’s still impressed with the willingness of insiders across many different industries to step up and buy their own stocks on the open market, despite some Wall Streeters’ warnings that stocks are overvalued.
“We’re seeing buying in a broad spectrum of companies,” Gabele says.
Industries where insider buying has been heaviest include real estate investment trusts, electric utilities, regional banks, drugstore chains, paper producers and clothing retailers, according to Gabele.
On the flip side, insider selling has been heaviest recently in such industries as computers, tobacco, aerospace and cable TV.
The Insiders letter’s Shirk says individual companies whose insiders have been particularly active buyers in recent months include Oregon Steel ($16.625 Friday, NYSE); Burlington Industries ($11.50, NYSE); Duff & Phelps Credit Rating ($10.75, NYSE); and Educational Insights ($6.50, Nasdaq), a Rancho Dominguez-based producer of learning aids.
Briefly: The U.S. Treasury will auction new two-year and five-year notes on Wednesday and Thursday, respectively. But yields are likely to be well below what investors garnered at the last such sales, in late January. Two-year T-notes now are yielding an annualized 7.06%, down from 7.57% in January; five-year T-notes are yielding 7.32%, down from 7.79% a month ago. . . .
Also coming to market this week with new securities: the state of California. It will offer $400 million in tax-exempt general obligation bonds on Wednesday, the first big state bond sale since Orange County’s bankruptcy in December. The bonds will be sold in terms ranging from one to 30 years. Yields are expected to range from 4.5% to 6.5%. . . .
Shareholders at the Walt Disney Co. annual meeting on Tuesday at Disney World in Florida will vote on two proposals aimed at giving small investors the ability to buy Disney stock direct from the company, without brokerage fees. One proposal would reinstate a dividend-reinvestment plan for Disney shareholders, replacing a plan that Disney terminated in 1990.
The second proposal would create a direct-purchase plan that would require participating shareholders to spend a minimum of $400 a year on Disney stock. Disney management opposes both ideas, saying the programs would be too expensive to service. Nearly 70% of Disney’s registered stockholders own 25 shares or fewer.
