Insider-Buying Pace Hits an 8-Year High

Corporate insiders are buying shares of their own companies at the heaviest pace since 1991--and considering that their purchases are coming during a rising market, insiders may be at their most bullish this decade, statistics show.

Top executives and other insiders typically buy shares after prices have fallen and sell steadily as they rebound. True to form, they jumped in aggressively in August amid the nearly 20% pullback in the Dow Jones industrial average.

But their buying remained consistent as the market recovered, and their purchases have picked up noticeably in recent weeks even as the Dow surged past the 10,000 and 11,000 marks.

“What is very impressive and somewhat unprecedented is that as the market has rallied sharply, insider buying has persisted,” said Robert Gabele, president of First Call/Thomson Financial, a Rockville, Md., research firm.

Because they often receive stock as part of their compensation, insiders historically sell 2 to 2.5 shares for every share they buy. But that ratio has been below 2 to 1 for the last 43 weeks, according to the Vickers Weekly Insider Report newsletter, and buyers have outnumbered sellers 19 times, including in the last four weeks.

That’s the most bullish streak since the period between November 1989 and March 1991, when the ratio sat below 2 to 1 for 71 weeks, including 47 weeks of purchases topping sales. In 1990, however, insiders did their heaviest buying as the Dow sank 22% from July through October following Iraq’s invasion of Kuwait. Their purchases tailed off significantly when stocks rebounded in early 1991.

In contrast, insider purchases were one-third higher last month than their average over the preceding 12 months, according to the Insider Bulletin newsletter.

“This is about as good as we’ve ever seen from an insider perspective,” said Richard Cuneo, editor of the Vickers newsletter.

Wall Street closely monitors the buying patterns of corporate insiders because they’re considered to have the best handle on the prospects for their companies and, indirectly, their stocks.

The only cloud on the horizon is that insiders have indicated that they may soon begin selling heavily. Insiders considering whether to dump restricted shares, such as those received in the form of stock options, must notify securities regulators in advance of the actual sales by filing so-called Form 144s.

Those filings were above average by 55% in February, by 50% in March and by 40% in April, Cuneo said. Once a form is filed, an insider has six months to unload the stock.

Insiders could be hanging on for the moment because their stock prices are rising, Cuneo said.

Insiders at big-name technology stocks have generally been sellers lately. But their counterparts in many other industries have been buying. Cyclical industries--such as chemicals, construction, energy and industrial machinery--have seen particularly strong buying.

In chemicals, insiders have been buying at Millennium Chemicals, Eastman Chemical and Lyondell Chemical, according to First Call.

Telecommunications, an industry in which stock prices have risen solidly this year, has experienced solid insider buying, said David Coleman, editor of the Insider Bulletin and a hedge fund manager who partially bases his decisions on insider buying.

He likes Chancellor Media, Cumulus Media, Hearst-Argyle Television, Price Communications, Cable Design Technologies and Hyperion Telecommunications.

Among real estate investment trusts, he recommends Host Marriott, Amli Residential Properties, Crown American Realty, Prentiss Properties and Summit Properties.

Walter Hamilton can be reached at walter.hamilton@latimes.com.