Despite the recent difficulty seen in the stock market, corporate ‘insiders’ – those privy to the intimate details of their companies finances – are betting big on their own businesses these days. The idea is to buy during these stormy times in the hopes of ‘making hay’ when the sun ultimately shines again.
In his book, Investment Intelligence from Insider Trading, Nejat Seyhun, who just happens to be a leading researcher in the field of insider buying and selling, illustrated that when top executives bought large amounts of his/her company's stock, the stock outperformed the broad market by +8.9% over the next 12 months. And given that the long-term average annual return for the stock market has been +9.5% over the past 70 years, this means that stocks with heavy insider buying possess returns that are nearly double those of the market indices.
Since late July, when the stock market boarded its topsy-turvy rollercoaster, financial executives have decided it’s time to snatch up shares of their own companies, basing their purchases on historical trends and past successes.
For instance, MarketWatch reports that following the July earnings report from AK Steel Holding Corp, which missed Wall Street’s profit target by 17 cents per share, CEO James Wainscott bought 25,000 shares of his company’s stock at an average price of $7.96 apiece.
Based on information released late last week, Wainscott had earned +14% since the purchase. For comparison purposes, the S&P 500 lost approximately -16% during the same time period.
Also, “Wainscott was one of the insiders who helped make a perfect market-bottom call,” …when back in 2009, the company was at an annual low, and the CEO made a similarly successful buy just prior to a market rebound.
“Thus it’s encouraging to see him step up here again,” said a representative from InsiderScore, a research firm that analyzes executive transactions.
When asked about Insider activity, StateoftheMarkets.com founder Dave Moenning said that his team is seeing a dramatic change taking place. While the analysis may be simplistic, Dave says the sheer volume of stocks now showing up on their “insider” lists has gone up exponentially over the past month.
“In our Insider Portfolio we were running into a bit of problem for much of the year. Week after week, the list of stocks earning our top “insider buy ratings” became skinnier and skinnier. And in the weeks leading up to the August swoon, we were only seeing four or five stocks that met our criteria.”
Due more to a lack of stocks to buy, Dave says that their Insiders Portfolio, wound up with a large pile of cash as the stock market rolled over.
“We weren’t really making a ‘market call’ with the portfolio; there simply weren’t enough stocks that insiders were buying heavily to fill out the sheets. Thus, we wound up with something like 45% to 50% cash in the portfolio as the swoon began,” Mr. Moenning said.
But now that situation has turned around – big time. From a list of only a handful of companies that insiders were buying – and buying heavily – a few weeks ago, Dave says that his team is now plowing through pages of stocks that meet their criteria for insider buying.
The founder of “State” added, “Last week, the list simply exploded to more than 150 names of companies that had heavy insider buying. And this week is off the charts with more than 220 names to pick from. In fact, we’re adding a day to our research cycle just to get through them all.”
Dave says the message is simple. “If this isn’t an indication that corporate America thinks their stocks are reasonably priced – if not priced at bargain levels – then I don’t know what is.”
In an article dedicated to the topic, MarketWatch reported that a former stock advisor to Warren Buffett, Louis Simpson shelled out $2.7 million August 8 for shares of Chesapeake Energy Corp. Since then, his Chesapeake investment is up +15%.
In another example cited, Fernando Aguirre, the chairman of Chiquita Brands International Inc. who has a reputation for buying at the bottom, bought over $1.2 million shares of his own company. On August 3, the fruit company dipped down a disappointing 20%; yet, following his purchase, Aguirre’s earned 14% and shares traded at almost $10 Friday morning.
In the beleaguered banking sector some executives are heeding the advice offered by influential banking analyst Dick Bove. On Tuesday, Bove, of Rochdale Securities, told CNBC that investors should be buying bank stocks with both hands.
According to MarketWatch, James Gorman, Morgan Stanley CEO completed his first insider buy since taking his position in 2010, spending $2.1 million on August 4 on shares at an average of $20.62 apiece. Of course, the jury is still out on the effectiveness of that particular purchase.
Yes, the market is volatile. Yes, the economic outlook is scary. But if you have a sufficiently long time horizon, it might pay to do what the men and women who know their companies best are doing – some buying.
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