Corporate Insiders Send Bullish Signs
Despite the stock market downturn, corporate insiders are buying more shares in their companies and selling fewer, signaling that they think stocks could be hitting bottom, analysts say.
In addition, companies are stepping up announcements of stock buybacks, in which they purchase their own shares using corporate funds. Buybacks can be a sign these companies think their stocks are a bargain, and are seen by some analysts as another bullish signal.
In the case of insider transactions, the ratio of overall insider stock sales to purchases has fallen sharply in the last six weeks, said Vickers Weekly Insider, a newsletter published by Argus Research Co. in New York. In the week ended Friday, buys outnumbered sells for the first time this year.
“We’ve seen a dramatic change in a short period,” David Coleman, editor of Vickers, said Monday. “The insiders are extremely bullish. They feel their stock is undervalued, and their message is, ‘Buy.’ ”
Newsletters such as Vickers track open-market stock purchases and sales by company executives and directors, who are required to report such transactions to the Securities and Exchange Commission. The purchase data exclude the exercise of stock options.
Investment strategists who watch these transactions use the collective wisdom of insiders as a market barometer. When insiders as a group are eager to buy at open-market prices and reluctant to sell, it often marks at least a near-term bottom in the stock market, these analysts say. Conversely, when selling spikes, it may signal a market top as executives take their profits in what they may think are over-priced stocks.
Coleman said his benchmark ratio, which compares sales with purchases over the trailing eight weeks among companies listed on the New York and American stock exchanges, fell to 3 to 1 as of Friday (or three sales for every purchase). The eight-week ratio hit a recent peak of 4.1 to 1 in mid-June.
The more volatile one-week ratio fell to 0.7 to 1 last week from 1.2 to 1 a week earlier, Coleman said.
These ratios compare the number of sales with purchase transactions, rather than overall share volume or dollar volume.
Historically, insiders usually are selling more than they’re buying, because of the inclusion in sales data of stock bought via options. Stock sales have outnumbered buys by an average of about 2 to 1 to 2.5 to 1, so ratios within that range are considered neutral.
Though Coleman said he normally would wait for his benchmark ratio to fall below 2 to 1 before turning bullish, the “rapid and substantial about-face” by executives warrants an early call, he said.
Stocks he recently has added to his recommended portfolio include Nortel Networks Corp., down 87% year-to-date as the wireless sector has continued its free fall, and Maytag Corp., down one-third from its 52-week peak in mid-April. At Nortel, insiders have reported buying 1.8 million shares in the last three months while selling 100,000; Maytag’s chief executive recently doubled his holdings in company stock, buying 18,335 shares in the $31 range, Coleman said.
Maytag closed at $30.89, down 11 cents, on Monday, while Nortel closed at 95 cents a share, up 2 cents. Both trade on the NYSE.
Meanwhile, corporations have stepped up their share-buyback programs, giving another boost to the argument that the stock market is bottoming.
In July, companies vowed to buy back $44-billion worth of stock, second only to last September’s record total of $53.6 billion, when a wave of buyback announcements followed the Sept. 11 terrorist attacks, said TrimTabs.com Investment Research.
Buybacks are seen as positive because they can increase earnings per share by reducing the number of shares outstanding, and because they may signal that companies think their stock is a bargain.
“When it comes to the stock market, the companies are the house,” said David Fried, editor of Buybackletter.com in Pacific Palisades, using a Las Vegas analogy. “They are absolutely the best judges of their valuation.”
Stocks that Fried said he likes based on recent buybacks or buyback announcements include check printer Deluxe Corp., aerospace giant Boeing Co., and cigarette maker Philip Morris Cos.
“In a way, if you take these two things together [insider buying and share buybacks], it’s economics 101: Anything that reduces supply is a good thing,” said Mark Hulbert, whose Hulbert Financial Digest tracks investment newsletters.
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Still, analysts urge caution in interpreting the various data.
“At these share prices you would expect to see more buying” by insiders, said Lon Gerber, who tracks insider activity for Thomson First Call. The Standard & Poor’s 500 index of blue-chip stocks is down 27.3% year-to-date.
Gerber called recent purchases by executives at J.P. Morgan Chase & Co. and Sun Microsystems Inc. “encouraging,” but said overall dollar volume of insider buying has remained flat.
Gerber, whose most recent totals are for June, said insiders bought $1.1-billion worth of stock in the first half of 2002--the same as a year ago. On a positive note, he said, sales fell to $15 billion from $22 billion in the first half of 2001 and $34 billion in the first half of 2000, when more gains were being realized because of the higher stock market.
What’s more, companies do not always live up to their buyback announcements, analysts say. Sometimes they are simply making a public relations move aimed at calling attention to their stock.
It’s also an open question whether investors, disillusioned by a wave of corporate scandals, will place as much credibility in the transactions of corporate insiders as they have in the past.
