August's Insider Trading Augurs Well for Stocks

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The stock market as a whole just turned in its worst August performance since 2001, with the major indexes posting losses ranging from 4% to 6%. Yet despite those negative numbers, there was one group that didn't act bearish at all – corporate insiders.

Insiders – the officers, board members and major shareholders of America's corporations – are required by law to almost immediately report to the Securities and Exchange Commission (SEC) any time they buy or sell the shares of their own companies. As such, insider transactions are tracked by a number of organizations and Wall Street analysts as a gauge of current market sentiment and future prospects for stock prices.

The theory underlying this practice is simple. As the people with the most intimate knowledge of what corporations are actually doing to grow their businesses, as well as the results those strategies are producing, insiders are in the best position to judge whether the fortunes of their companies are looking bright – or dismal. When they like what they see, they buy their company's shares – and when they don't, they sell.

And, recently, they've been buying.

That is clearly evidenced by the most recent issues of the Vickers Weekly Insider Report, a market news service that reviews current insider trading activity and calculates a ratio comparing the number of shares sold by insiders each week to the number of shares they purchased. For the final week of August, that sell-to-buy ratio dipped to just 1.02-to-1.00 – marking its third consecutive decline and the lowest level it has reached in more than 16 months (since early April 2009).

That reading is less than half the long-term average for the Vickers ratio of 2.50- to 2.00-to-1.00 – and decidedly bullish, as borne out by the market's early September rebound. It's also well below the ratio of 1.26-to-1.00 reached in early June following the market's sharp spring sell-off and the reading of 1.58-to-1.00 at the early July market low.

The weekly list of insider buys released by Vickers, and monthly lists produced by Insider-Monitor.com, show the purchases spread across a wide range of market sectors, though the heaviest activity has been concentrated in the financial sector. Six of the top 10 firms on the Vickers list were in that category, led by Citizens Financial Services Inc. (OTC: CZFS). Shares in CZFS, a Pennsylvania-based bank holding company, were purchased 39 times by 16 different insiders, versus just four sales.

New York-based holding company Suffolk Bancorp (Nasdaq: SUBK) was second on the Vickers list with 37 insider buys and no sales. But the third spot went to The York Water Company (Nasdaq: YORW), a Pennsylvania utility that saw 28 insider buys and no sales. An insurance company and a venture-capital group also made the Top 10, while the honors for most shares bought went to Sunesis Pharmaceuticals Inc. (Nasdaq: SNSS). Ten insiders bought more than 179 million shares of the cancer-drug research company, which had no insider sales.

Lest you think all of the insider buying was in small companies you never heard of, the No. 3 company on the list of Top 10 buys for all of August was Motorola Inc. (NYSE: MOT), though billionaire investor Carl Icahn accounted for 14.77 million of those share purchases in five separate transactions worth roughly $110.8 million dollars.

Other leading companies that saw major insider buying activity in August included: Molycorp Inc. (NYSE: MCP), Texas Industries Inc. (NYSE: TXI), Gibraltar Industries Inc. (Nasdaq: ROCK), Spectrum Brands Holdings Inc. (NYSE: SPB), Arbitron Inc. (NYSE: ARB), Level 3 Communications Inc. (Nasdaq: LVLT), Duke Realty Corp. (NYSE: DRE), The Brink's Company (NYSE: BCO), BlackRock Inc. (NYSE: BLK), Consolidated Edison Inc. (NYSE: ED), Hormel Foods Corp. (NYSE: HRL), Kimberly Clark Corp. (NYSE: KMB), and La-Z-Boy Inc. (NYSE: LZB).

That's just a small cross-section of the types of companies that saw significant insider buying in August, indicating at least moderate bullishness among corporate executives and directors across most of the market's leading sectors.

The one sector that didn't experience bullish insider sentiment was Wall Street itself, where executives of some of the leading brokerage and financial firms continued a selling trend that has seen them unload more than $100 million worth of shares so far in 2010. The companies most affected, according to the research firm InsiderScore, included Goldman Sachs Group Inc. (NYSE: GS) – where insiders including CEO Lloyd Blankfein, CFO David Viniar and President Gary Cohn have sold $64 million worth of shares this year. Also included in the sell-off was J.P. Morgan Chase & Co. (NYSE: JPM) – with $16 million in insider sales – Wells Fargo & Co. (NYSE: WFC) – where CEO John Stumpf and Wealth-Management Director David Carroll recently sold a combined $11 million worth of stock – and Citigroup Inc. (NYSE: C) – with $5 million in insider sales.

Of course, selling in that sector may have more to do with the modest recovery in financial stocks since the dramatic 2008-2009 collapse than it does the sector's outlook. Executives simply could be trying to grab some short-term profits to recoup their losses – or ensure they don't wind up with entirely worthless holdings like their former associates at the now-bankrupt Lehman Brothers Holdings Inc. (PINK: LEHMQ).

While insiders haven't been perfect in predicting market moves – they were off the mark during much of 2007 – they've been right far more than they've been wrong over the last 50 years or so. Plus, their individual actions recently have been supported by another measure of insider sentiment – corporate buyback announcements.

Companies authorize repurchases of their own stock because they believe the shares are undervalued at current market prices and buying them back provides the most value to stockholders.

The trend in stock buybacks has been upward all year, with $55 billion in first-quarter share repurchases among companies in the Standard & Poor's 500 Index – up from $48 billion in the fourth quarter of 2009 and $34.8 billion in the year-prior quarter. The final numbers for the second quarter of 2010 aren't yet in, but announced repurchase authorizations indicate the buyback total could top $62 billion, fueled by the sharp April-to-June decline in stock prices and the cash-rich status of many corporate treasuries, which held a record $1.01 trillion at the end of the first quarter.

The three companies with the largest buyback programs in the first quarter were IBM Corp. (NYSE: IBM), $4.02 billion; Wal-Mart Stores Inc. (NYSE: WMT), $2.97 billion; and Exxon Mobil Corp. (NYSE: XOM), $2.5 billion. IBM added another $3 billion to its buyback program in late April, Wal-Mart announced a new $15 billion buyback program on June 4, and Exxon Mobil expanded its plan to $3 billion on July 8.

Other major repurchase authorizations in the second quarter included: Bunge Ltd. (NYSE: BG), $700 million; Monsanto Co. (NYSE: MON), $1 billion; C.R. Bard Inc. (NYSE: BCR), $500 million; CVS Caremark Corp. (NYSE: CVS), $2 billion; Cablevision Systems Corp. (NYSE: CVC); $500 million; AutoZone Inc. (NYSE: AZO), $500 million; Northrop Grumman Corp. (NYSE: NOC), $2 billion; Dollar Tree Inc. (Nasdaq: DLTR), $500 million; Adobe Systems Inc. (Nasdaq: ADBE), $1.6 billion; The Kroger Co. (NYSE: KR), $500 million; and General Mills Inc (NYSE: GIS), 100 million shares worth roughly $3.6 billion.

In August alone, 89 companies announced new or expanded buyback programs, led by Hewlett-Packard Co. (NYSE: HPQ), which authorized a $10 billion program on Aug. 30. Other billion-dollar-plus programs okayed in August came from Lorillard Inc. (NYSE: LO); Intuit Inc. (Nasdaq: INTU); DirecTV (Nasdaq: DTV); Discovery Communications Inc. (Nasdaq: DISCA); VeriSign Inc. (Nasdaq: VRSN); and Aetna Inc. (NYSE: AET).

Buyback programs take a variety of different forms and, as with insider buys, don't always lead to higher share prices in the near term.

Still, if you're like most individual investors out there, it's unlikely you have more insight into a given company's anticipated fortunes than the people sitting behind the executive desks or around the boardroom table.

So, if you're looking for some new stock ideas, why not take a cue from what the insiders are doing?

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Join the conversation. Click here to jump to comments…

  1. Gene Janssen | September 10, 2010

    And Bill Gates , Keeps selling his Microsoft past 7 years .

  2. herbalfrezh | September 24, 2010

    good topic for explain to us, thanks.

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