Insiders On Buying Spree
Fearless Front Office: Most Insider Buying Since 1998
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On Tuesday August 16, 2011, 4:35 pm EDT
As regular investors fled the unprecedentedstock market volatility this month, purchases by company executivesrelative to sales hit the highest levels since 1998, according to one ofthe more widely-watched insider buying newsletters on Wall Street.
Therewas an almost eight-fold increase in buy transactions over two weeksand 16-fold jump during the last three weeks, according to VickersWeekly Insider, which is published by Argus Research.
The ratioof sale transactions vs. buy transactions dropped to 0.35, the lowestreading since during the bull market in 1998 and one of the rareoccasions when purchases actually outnumbered sales, said the Vickersreport from Monday.
A ratio below one is meaningful becauseselling typically always outweighs buying because of options expirationand other factors. The ratio was last below one in March of 2009, themonth the current bull market began.
"With market volatilityincreasing last week, corporate executives and directors have seized theopportunity to increase their holdings," said David Coleman of Vickers,in the report. "Insiders have turned bullish. Very bullish."
TheDow Jones Industrial Average moved more than 400 points four days in arow last week for the first time in the benchmark's history. Thegyrations caused retail investors to yank more money out of equitymutual funds than they have during a single week since 2002, somethingwe first told you about on Monday. (Click here to go to Volatility Sparks Biggest Fund Exodus Since 2002.)
Traders,for the most part, believe insider buying has a spotty track record asfar as market timing is concerned because sometimes the purchases arejust token PR ploys. Other times, the insiders don't have quite theinsight that one might think they have, as was the case during a pop ininsider buying in 2008 before the bear market lows. However, theintensity of this recent buying has certainly gotten people's attention.
"I'ma skeptical sort, but have noticed the insider buying in some of thestocks I own and monitor and I am unabashedly impressed," said StephenWeiss of Short Hills Capital and formerly of SAC Capital.
OnAugust 8, when the turmoil began, the S&P 500 plunged almost 7percent as investors got their first chance to flee risk after theStandard & Poor's downgrade of the U.S. long-term credit rating.Insiders did the opposite however, as 47 buy transactions were countedamong CEOs, CFOs and COOs of companies during that trading day,according to StreetInsider.com.
"This data should be highlightedin conjunction with all the negativity in the market," according to areport from the research web site after the close that day. "The datasuggests these insiders see major value in their company stocks atcurrent levels and are looking to put their personal money to work tobuy on the cheap."
StreetInsider cited purchases by Jon Corzine the CEO of MF Global (NYSE:MF - News) and Jeffrey Mezger the CEO of KB Home (NYSE:KBH - News). Among the more notable purchases that came later in the week were insiders from JPMorgan (NYSE:JPM - News), Chesapeake Energy (NYSE:CHK - News), NYSE Euronext (NYSE:NYX - News), Kraft (NYSE:KFT - News), GM (NYSE:GM - News) and Corning (NYSE:GLW - News).
InsiderScore.com,which tracks the performance of insiders' purchases, gave particularweight to the $877,000 purchase on Aug. 10 by Jim Flaws, CFO of Corning,and the $251,000 purchase by GM CEO Daniel Akerson on Aug. 9.
"Welike that Akerson, who took home a base salary of $567,000 last year,continues to put his cash to work," stated an InsiderScore report thatday. Flaws' purchase "is his first since he made an exceptionallywell-timed call in November 2008, when the stock hit what is now aneight-year low."
The stark contrast in reactions between investorsand CEOs may be a function of time horizon. One would expect anexecutive to have a much longer holding period than investors today,especially when you take into account all the day traders andhigh-frequency hedge funds out there.
"While valuations appearattractive, the question remains, is this a buying opportunity?" wroteLarry Adam, chief investment strategist for Deutsche Bank Private WealthManagement, in a note. "Depending on your investment horizon, theanswer is both 'yes' and 'no.' For long term buy and hold investors, thefavorable view on equities is based on attractive valuations."
Adamcited the fact that the average dividend yield for companies in theS&P 500 is the same as the 10-year Treasury yield for only thesecond time over the past 30 years. Executives probably feel at theselevels, their company's growth prospects are better over 10 years than aTreasury note.
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