Six stocks insiders are snapping up
While recent volatility sparked panic selling, those in the know were buying. Among the names insiders thought were bargains: Morgan Stanley, Hasbro and Berkshire Hathaway.
Good news: Stocks are stabilizing.
But is this just the eye of the storm, or was the frightful first fortnight of August merely a bull market correction that's almost over? The question is critical, because the latter would mean it's a good time to snap up bargains in the market.
I'm definitely in the "almost over" camp for a simple reason: Corporate insiders — the guys and gals with the front-row seats on the economy — are back in the market in a huge way.
"There's been a dramatic shift towards buying," says Richard Uhl, a research analyst with Thomson Reuters. Insiders have been snapping up so much stock, he says, they're now as bullish as they were during those bleak moments in February and March of 2009 — when the market was bottoming after another monster sell-off.
That's a sign that those buying stocks in the wake of the pullback are right — and in case you want to join in, I'll name several blue-chip plays that insiders are buying later in this column. First, let's take a deeper look at what the insiders are telling us about the road ahead.
Insiders chasing profits
Of course, the big fear among investors is that the economy is now flying at stall speed. Many pundits think job growth is so low that consumers will cut back on spending. Companies will see demand drop and cut jobs, leading to a vicious cycle that sends the economy into a tailspin. Goldman Sachs economist Jan Hatzius just raised his odds for a U.S. recession to one in three.
But the insiders' voluminous buying says that isn't in the cards. "As the markets crashed, insiders were just seizing the opportunity to snap up shares," says David Coleman of Vickers Weekly Insider, published by Argus Research. "The fundamental reason they are buying is they think those shares are undervalued." In other words, stocks look cheap compared with expected profits, because the dire recession scenario isn't going to play out.
At least some Wall Street analysts agree. "The current S&P 500 market price is implying a reduction in earnings that we find unlikely," Barclays strategist Barry Knapp wrote Monday morning. "We believe the macro outlook is stabilizing."
But what about the other big fear, that European banks will blow up because of exposure to the debt of over-borrowed countries, like Greece and Italy? I'll take the big insider purchases by top execs at JPMorgan Chase (JPM.N) ($6.8 million) and Morgan Stanley (MS.N) ($3.8 million), not to mention lots of regional U.S. banks, to mean that those fears are overdone.
The doomsday scenario is that European banks will blow up in a "Lehman moment," which would seriously harm U.S. banks because the global financial world is so interconnected. But U.S. bank insiders are saying it's not going to happen. "We see some signs that policymakers in Europe are having a degree of success," agrees Knapp.
For those who want some hard numbers on the insiders' buying overall, here's my summary of the big-picture data provided by Thomson Reuters.
For just the first third of August (through Aug. 10), insider buying jumped to $112.6 million, more than the average monthly buying of $104 million during 2010 and through the end of July of this year. Meanwhile, insider selling for the first 10 days of August fell to $546 million, well below the average of $876 million for a third of a month during 2010 and 2011 through July. The result: The Thomson Reuters sell-buy ratio fell to 4.85 (lower is bullish) in early August, a level not seen since the bear market lows of February and March 2009. In those months, the sell-buy ratio stood at 5.1 and 3.9, respectively, and marked a buying opportunity.
Of course, insiders are known to buy for the long term, which means they often buy in a little early. Their purchases don't call the exact bottom of the market; no one can do that. You should be aware that Michael Painchaud, of Market Profile Theorems, who has made a few good market-timing calls lately, thinks stocks could fall back again and test the recent bottom. But there's no doubt that insiders seem bullish and are buying with a ferocity last seen during the last market bottom.
Here are some well-known, large-cap, brand-name companies where insiders were recently snapping up shares. Most of these also pay decent dividends. So if the insiders were early, at least you'll get paid to wait.
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