Insiders Give Away Their Thoughts When Buying: John Dorfman
One stock market indicator that doesn’t get enough attention is the purchase or sale of company shares by insiders.
Most investors -- professionals and amateurs alike -- seem to pay scant attention to these transactions. I think such trades give useful cues for stock picking, and I suggest the following guidelines for interpreting them.
Purchases by chief executive officers, chairmen and presidents have more predictive value than purchases by directors or lower officers. Those who sit in the corner office usually have the most complete picture of how a company is doing.
Large purchases count for more than small ones, of course. In this regard, dollar value is a better measure than the number of shares. An executive who buys 100,000 shares of a stock selling for pennies hasn’t really put big money on the line.
Open-market purchases are more significant than the purchase of shares by exercising stock options. In many cases, the terms of an option are such that an executive would have to be a dolt not to exercise it.
Watch for reversals. When an executive who has been selling shares turns around and starts buying, that can be a bullish sign. It’s also noteworthy when someone who has been accumulating shares shifts gears and starts to shed them.
Finally, try to determine how an insider has done with his or her purchases and sales in the past. Some executives have a much better feel for the market than others.
Finding Buyers
Using Bloomberg analytics, I identified the companies in the Standard & Poor’s 500 Index whose insiders purchased the largest dollar amounts of stock in the three months ended Sept. 1. Five companies headed the list: Legg Mason Inc., EMC Corp., Akamai Technologies Inc., Monsanto Co. and CME Group Inc.
Legg Mason, a Baltimore-based money-management firm, topped the chart with a 1 million-share purchase by one insider, valued at $30.4 million. This insider was not an individual but an investment firm, Trian Partners.
Legally, an insider is an officer, director or holder of at least a 5 percent stake in a company. Trian Partners qualifies as a Legg Mason insider because, with its recent purchase, it owns about 7 percent of Legg Mason stock.
Nelson Peltz, the founding partner of Trian, is a man who likes to buy into companies when they have problems, so he can build his positions cheaply. In Legg Mason, I think Trian made its move at a time when the money-management industry is near the point of maximum pain. (I should know.)
Not surprisingly, Legg Mason’s glory years were 2006 and 2007, when Wall Street was high and mighty, not cringing and crying. The stock’s high was about $136 in 2006; today it fetches about $28. The company had a massive loss of $1.97 billion in 2009, equal to $13.99 a share, but is back to profitability. I think a comeback is likely.
EMC, Akamai
The second-largest insider purchase was $12.4 million at EMC and the buyer was none other than the company itself, buying back 161,000 shares in late August.
I like to see companies buying back their own stock. Based in Hopkinton, Massachusetts, EMC is the world’s biggest maker of storage computers.
Regrettably, I can’t get too excited about EMC’s stock. Even as the company was buying shares, 10 officers and directors sold some of their personally owned shares in August. At 24 times the past four quarters’ earnings and 16 times estimated 2010 earnings, the stock seems about fairly priced.
Dot-Com Star
At Akamai Technologies, three insiders have purchased $3.6 million of stock in the past three months. Based in Cambridge, Massachusetts, Akamai provides products and services to speed and monitor Internet traffic.
The big purchase was almost 48,000 shares snatched up by Peter J. Kight, managing partner of Comvest Investment Partners in New York City and an Akamai director. Back in 1981 Kight founded CheckFree Corp., an electronic financial transactions company now known as Fiserv Inc. His recent purchase was about four times the size of his previous holding.
If you lived through the Internet bubble of the late 1990s, you may remember Akamai stock trading as high as $327. It fell to less than $2 in 2002. Today the shares hover at about $50. That works out to 47 times earnings -- too high a multiple for my taste.
Monsanto
Better in my opinion is Monsanto. At 22 times earnings, the stock is suitable for growth investors, though a little pricey for a cheapskate like me.
Two top Monsanto executives bought $3.5 million of stock in the past three months. The purchases beefed up the already substantial holdings of Hugh Grant, CEO, and Carl Casale, chief financial officer. The St. Louis-based company produces seeds, works with plant genomics and makes herbicides.
Rounding out the top five is CME Group, which operates the Chicago Mercantile Exchange. There, two insiders bought $1.5 million of stock. The big buyer was William R. Shepard, a director. He had sold some shares in 2006 and 2007, when they were much more expensive. This is his first significant open- market purchase since then.
At 18 times earnings, CME Group looks like a reasonable purchase to me.
Disclosure note: I have no long or short positions in the stocks discussed in this column, for clients or personally.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com
To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net
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