Investors looking to glean tips by analyzing the stocks insiders are buying may have had some difficulty recently: A lot of the insiders have disappeared.
Insiders – top executives, directors and large stockholders – are in the best position to judge whether the fortunes of their respective companies are looking bright or dismal. When they like what they see, they buy their company's shares – when they don't, they sell.
These in-the-know investors typically load up on stock when shares are cheap. They bought heavily during the market lows of 1987, 1998 and 2008-2009. They also continued purchases in 2010 after the market had its worst August performance since 2001.
This year had been no different – until now.
"They've stopped buying," Charles Biderman, chief executive officer of investment research firm TrimTabs, told MarketWatch. "Insiders aren't buying this rally. It looks to me that insiders are uncertain as to what's happening."
There are still some stocks insiders favor – but a frighteningly fewer number than just last month.
Halted Insider Buying: A Bearish Signal
Insider stock purchases were up to $162 million a day in the five trading days between Aug. 2 and Aug. 10 – a faster buying rate than when the market bottomed in March 2009.
Insider purchases then tumbled to only $13 million a day by Sept. 14, according to TrimTabs.
That's a 92% drop from the high-buying days in early August, and 59% below the year-to-date average of $32 million.
The buying slowdown came even before last week's heavy losses.
Not only has the insider buying slowed down, but the ratio of insider sales to purchases went from almost equal last month to heavily favoring selling in September. Insiders are selling $7 in stock for every $1 purchased.
"Insiders know more about their companies' prospects than anyone else, so it is not positive that they have curtailed their buying so sharply," TrimTabs said in a statement.
Retail investors started fleeing markets weeks ago, but the fact that insiders have joined them is a bearish market signal.
However, it seems not everyone is uncertain. There are still stocks with active insider buying – and these can offer some great buys for investors as whipsaw volatility continues.
The Stocks Insiders are Buying
The following companies have seen some big stock purchases after insider activity dropped off at the beginning of September:
- NL Industries Inc. (NYSE: NL) is a holding company with a subsidiary CompX International Inc., a component maker for communications suppliers in the United States, Canada and Taiwan. NL's Chairman, CEO and President Harold Simmons, bought a modest 855 shares on Sept. 6, then added 5,000 on Sept. 9 and another 15,000 on Sept. 19. NL has a 4.0% dividend yield – a sought-after factor in today's topsy-turvy market – and a payout ratio of 23%. The shares are up 53% in the past year and closed at $12.30 Monday.
- Hess Corp. (NYSE: HES) is a global energy company that produces, markets and refines crude oil and natural gas. CEO John Hess bought 174,950 shares on Sept. 19 for $10,001,892. Hess just increased production capacity with $1.34 billion in investments in the Ohio Utica Shale area, which is being touted as the next big U.S. energy field. The stock closed at $54.09 Monday – a 35% fall from this year's high – but as oil prices climb back up, so will Hess.
- Lincare Holdings Inc. (Nasdaq: LNCR) provides oxygen and other respiratory services to patients at home. Chairman and CEO John Byrnes bought 25,000 shares on Sept. 19 at an average price of $20.79. For the quarter ended June 30, the company reported net revenue of $449 million, a 7.3% increase from the second quarter of 2010. The company has had annual average earnings growth of 8% over the past 10 years and a dividend yield of 3.8%. Bloomberg analysts estimate the stock will rise 36.5%, to $29.10, in the coming 12 months; the stock closed at $21.25 Monday.
- Hyatt Hotels Corp. (NYSE: H) Insider Mark Hoplamazian bought 45,000 shares of the hospitality company on Sept. 13 for $1.4 million. The company reported quarterly results on Aug. 2 with earnings per share of 27 cents, almost double the 15-cent analyst estimate. Quarterly revenue rose 5.3% from the year prior. Deutsche Bank AG (NYSE: DB) analysts just initiated coverage on Hyatt Sept. 21 with a "Buy" rating, and FBR Capital analysts raised the price target from $48 to $51 a share. Hyatt closed at $31.42 Monday.
News and Related Story Links:
Why the insiders have quit buying stocks
- Money Morning:
August's Insider Trading Augurs Well for Stocks
- The Street:
6 Home Health Care Stocks to Watch
- The Motley Fool:
Hess is Making Moves