Do corporate insiders know something that outsiders don't? In August, insider buying -- stock purchases by executives and directors in their own companies -- turned up sharply, hitting the highest level in eight months, according to a new research report by Thomson Financial, which closely tracks trading by insiders. Buying increased in most sectors, from outfits in the hard-hit telecom and capital-goods industries to retail chains and consumer-product makers.
Such buying can signal that insiders are more confident about business prospects than outside investors. Taken together, it can indicate "that the economy is not in as sorry of shape as people think," says Bruce Steinberg, Merrill Lynch's chief economist.
VOTES OF CONFIDENCE. Officers and directors bought $230 million worth of shares in August, up 57% from $146 million in July, according to Thomson. That's the highest level since January, when insiders bought $259 million in shares. Purchases were up in 8 of 11 broad business sectors, showing the biggest gains among technology businesses and consumer-service outfits, which include retail chains.
The increase comes as the overall stock market has shed nearly half its value from its peak in March, 2000, and amid new signs that the economy is losing more momentum. "Clearly, insiders are taking a long-term view," says Lon Gerber, Thomson's director of insider research.
Most of the purchases were made at corporations with smaller stock-market capitalizations -- under $1 billion -- such as machine-tool-maker Milacron and teen retailer Wet Seal. But some large-caps were standouts, too. At struggling telecom giant Lucent Technologies, eight directors and officers, including CEO Patricia Russo, bought 1.8 million shares at prices of $1.42 to $1.77 a share. That was the first purchase by insiders in five years.
EARLY INDICATOR. Then there's fiber-optic maker Corning, which is also posting losses. In August, five officers and directors bought 1.3 million shares, at prices from $1.56 to $2.25 a share. A director at Limited Brands, one of the nation's largest specialty-apparel retailers, purchased 153,000 shares at $16.23 a share.
Investment strategists and economists watch such buying because insiders presumably have a better read on where the business is heading than outsiders. But they usually buy too early as overall stock-market psychology continues to push prices down, notes Ralph Acampora, a research director at Prudential Securities. Indeed, Thomson Financial's research suggests that a pickup in insider buying is a better indicator of the stock market's direction three months to six months down the road.
Nor is inside buying a good gauge of when and how fast earnings will improve. Lucent insiders bought shares prior to the outfit's warning Sept. 13 that it would post a larger loss than expected for its current fiscal quarter. A Lucent spokesman declined to comment on the timing of the buys, saying only that purchases reflected confidence in "long-term prospects of the company." Lucent stock has since fallen below $1 a share.
UNCERTAIN TIMING. While the uptick of insider purchases suggests that officers and directors believe their stocks are good buys relative to future earnings growth, it says nothing about the speed of a recovery. Ethan Harris, co-chief economist at Lehman Brothers, suspects that much of the buying could be based on confidence executives have in their ability to improve profits through cost-cutting.
Shedding jobs and reducing other expenses will of course lift earnings, but it will create a far less buoyant recovery than if sales were rebounding, too, he says. "Cost-cutting is a powerful way to grow profits but not the economy," he adds. Insiders may see light at the end of the recessionary tunnel, but it may take a while before outsiders bask in its glow. By Robert Berner in Chicago