Insider Trends in the Financial Sector

Pop quiz: Over the past six months, one sector of the market has seen more insider buying than any other. Can you name it?

If you think it’s technology, you’d be wrong. Yes, the sector has enjoyed a resurgence in recent months, but not enough to whip up a heavy enough wave of insider buying as the sector I’m talking about.

Healthcare? It’s an excellent investment area during tough economic times, due to the essential nature of drugs and medicine that produces plenty of repeat business. But that’s not it either.

No… the answer is the financial sector. Large insider purchases have occurred at some of the following companies:

Wells Fargo (WFC) *

Bank of America (BAC) *

Wachovia Bank (WB)

Fifth Third bank (FITB)

American Express (AXP)

Genworth Financial (GNW)

Colonial National Bank (CNB)

* Market purchases by existing holders like Warren Buffett’s Berkshire Hathaway.

But for all the strong insider buying, financial shares have endured a beating.

What gives? Insider buying is one of the best market indicators. Always has been. But could all these insiders be wrong? And if they are, the question is: If the guys running these companies can be so wrong, what chance do ordinary investors have? After all, these are the people involved in the day-to-day operations and privy to details that will never be public. Are they just plain stupid? Let’s find out…

Short Versus Long

In the investment world, there are two types of investors:

Short-term: These guys look to be in and out of a stock in a matter of weeks, sometimes days. They’re looking for trading opportunities, not necessarily value.

Long-term: These investors look past the daily market noise and hype, focusing instead on the next 12-18 months for a return on their capital.

Insiders definitely tend to have a longer-term outlook. Insider buying is historically a very early indicator. For example, insiders cannot buy shares on Monday, knowing there will be good news on Friday, because they can’t trade on material information.

Instead, they buy shares on anticipation and optimism that their company is poised for future success. In addition, insiders can’t sell shares for a good length of time after buying them.

So when it comes to the current financial sector pain, the insiders who bought shares in their own companies are suffering just like regular investors.

However, here’s why you should pay attention to these trends…

Putting Their Money Where Their Mouths Are

More often than not, insider buying is a very accurate indicator – especially when a certain company’s insiders buy shares in a cluster pattern. They’re right more often than they’re wrong – and usually by a very wide margin.

You have to remember that insiders buy thousands of shares with several thousand, sometimes millions, of their own dollars. It’s not just a few hundred bucks here and there.

Ask yourself why anyone would bet the farm like this just to lose it. It may happen occasionally, but rarely when insiders buy with such gusto and such size. Such heavy buying usually signals some serious optimism.

And with the financial sector, there’s another factor at work…

A Unique Opportunity In A Mammoth Sector

In terms of financial sector shares, many insiders realize that that the current battering gives them a unique opportunity: To buy high quality stocks at very discounted levels.

This is a real “kitchen sink period” for financials – companies want to announce all their ugly losses to the market at once and get the pain over with quickly.

Financial stocks with heavy insider buying look extremely attractive now. They may look even more attractive next week. But I’d say that a year from now, they will look much less attractive from an investing standpoint.

So what’s the best way to follow the insiders?

The All-Important “Insider Window”

The key to following insider trades is timing.

If you’re looking to hop on the bandwagon with these astute folks (and remember, they know more about their companies than anyone else), you want to buy after the insiders buy.

That means you want to buy in a 3-6 month window after the insider buying has taken place. Why? Because insider buying as a forward-looking indicator is usually not confirmed by the market for a period of at least 6-9 months in the future.

You must be patient. Don’t fall into the trap that many ordinary investors do – that is, they do all the hard work by following the trends and buying shares, but then get antsy and sell at a loss within that 6-9 month period because “nothing” happened.

They then watch as the shares begin to move up in “miraculous” fashion.

But it’s not a miracle at all. It was the insider buying indicator working in time-tested fashion: Buy shares when they’re cheap and hold them until they are expensive.

Believe me, insiders also have an uncanny knack for selling at (or near) the top. Right now, they’re not selling in the financial sector; they’re buying like there is no tomorrow. We’ll check back at the end of the year to see if their strategy has worked or not. But you could do a lot worse than buying some financial sector shares now.

Comments

[phinsuntanning]

no insider buyers in LEH, that is enough sign to be short

[User 180612]

I don't know who this Rahemtulla guy, but I don't know what he is talking about. I went through each of the banks he listed and I certanly wouldn't say "they’re buying like there is no tomorrow". There has been a few token purchases, but nothing of significance. There has been some stock gifted to officers, which are called Acquisitions or Awards, but they're not purchasing shares. Big difference! In fact, I've been watching very closely for exactly what this guys claims and it hasn't happened.
Look for yourself at any of the insiders website and at the companies listed or any financial stocks for that matter, there has been no major buys. And why wouldn't they be buying if they are so underpriced?
I don't normally respond to things like this, but I figured this guy Rahemtulla, must have an agenda, because his assertions "they’re buying like there is no tomorrow" is just plain wrong.

[locke]

Here's what Scottrade has to say:

No BAC insider has purchased company stock this year.
No WFC insider has purchased company stock this year.
Insider Sentiment for WB is Neutral
Insider Sentiment for FITB is Neutral
Insider Sentiment for AXP is Neutral
Insider Sentiment for GNW is Neutral
Insider Sentiment for CNB is Neutral

Either Karim's definition of "insider" is different from that of Scottrade, or there is a mistake somewhere.

It seems "like there's no tomorrow" is a bit of an overstatement.

[John Egan]

'Token purchases' is not the same as 'insider buying.' If there is any buying in this sector, then my guess it's just window dressing... If I were in their shoes, I'd be putting out as many indicators as possible that 'business is O.K!'. There's a lot of 'image' going on right now - What with the Fed and Paulson and the G7 etc.. I'd wait for some real buying and also look at 'large fund' purchases ... As well as 'wait a bit'.. I don't even like financials.. But I'll but a mixed lot when things look 'real'...

Thx jegan ;-)

[John Egan]

'Token purchases' is not the same as 'insider buying.' If there is any buying in this sector, then my guess it's just window dressing... If I were in their shoes, I'd be putting out as many indicators as possible that 'business is O.K!'. There's a lot of 'image' going on right now - What with the Fed and Paulson and the G7 etc.. I'd wait for some real buying and also look at 'large fund' purchases ... As well as 'wait a bit'.. I don't even like financials.. But I'll but a mixed lot when things look 'real'...

Thx jegan ;-)

[John Egan]

'Token purchases' is not the same as 'insider buying.' If there is any buying in this sector, then my guess it's just window dressing... If I were in their shoes, I'd be putting out as many indicators as possible that 'business is O.K!'. There's a lot of 'image' going on right now - What with the Fed and Paulson and the G7 etc.. I'd wait for some real buying and also look at 'large fund' purchases ... As well as 'wait a bit'.. I don't even like financials.. But I'll but a mixed lot when things look 'real'...

Thx jegan ;-)

[Powerdoc]

Although I agree that heavy insider buying is very bullish for a stock, I'd like to see Rahemtulla's reply to the above comments implying that there is no evidence for such buying.

[Powerdoc]

I think Rahemtulla has confused "institutional buying" with insider buying. Although there has been heavy institutional buying for these financial stocks in recent weeks, that is NOT the same as insider buying.

[Trader T]

There has been very little insider buying in the financial sector - that's one of the reasons so many continue to be short. Either the author is a spin guy for the banks or he doesn't know how to interpret financial data.

[CNG]

I see the same thing that the author notes for Wachovia. I can't confirm for all banks.

In the past few months, several Director have purchased millions. This includes one 19 million purchase. The CEO purchased 3.9 million.
These seem like more than token purchases to me.

This can be easily confirmed in MSN money - insider purchases.

Chris

Correct me if I'm mistaken.

[gordon]

I looked at the first 3 banks, WFC & BAC were EXERCISED OPTIONS.
WB had 30K shares bought by a director in March, big deal, and you need to read the SEC Filings, for instance, the 2K shares just purchased was WB 8% PREFERED STOCK.>tinyurl.com/3vupgn
You talking about institutional buying.

[tdi]

The other side of this coin is that they are putting their mouth where their money is...not the other way around...banks are in the confidence business at the end of the day - nothing less, nothing more - Excel does most of the heavy lifting and that isn't "worth" an SG&A line item of $100MM in salary to anyone. Lest anyone forget the "optimism" shown just before Bear Stears met its maker. Facts don't stop being facts just because they're ignored.

[CNG]

Gordon

Instead of just looking at March, take a step back. In the last 6 months WB had 6 insider buys valued at 32.4 Million, 1 insider sell valued at 158K. This excludes acquisitions and disposals from options.

This data is from J3SG - a site specializing in insider data. Also confirmed at MSN money.

Chris

[lnl]

".… the answer is the financial sector. Large insider purchases have occurred at some of the following companies " some?? why make a list with "some of the following companies"?

check out the insider purchases here. Link should put you to BAC info and see for yourself
www.insidercow.com/

[arizonamikes]

There seems to be a lot of cheerleaders, out there in the media, for the finance stocks. The media ran the Lehmans analaysis of Citi Fri., to the ground. It's intresting Lehman and C are in the same "kettle". Where was the Interviews with the like's of Meridth Whitney. Who can believe anyone in finance at this point in time? IE Bear Sterns CEO flat out lied just 2 wks before it CRASHED. Another CEO since then made a false statement,too, the company and CEO'S names elude me. Are these people held responsible for their statements?

[willisj]

BAC, WFC & USB are Buffett buys; I'd be cautious shorting them. He often buys more when they return to HIS "fair value" mark.

[Zeninvestor]

ETFC had all the officers buying, and holding in January and February. That and compensation for the new CEO that is almost all in stock and options made me a believer in that stock, and I look for it to break out.

Most of the financials have so far written down their mortgage portfolios to two or three times any anticipated 'net losses'. The earning surprises in the future will all be to the upside. Two more quarters and liquidity will return, and the vintages will have seasoned to the point where you can accurately predict the 'real losses'. That is why financials are moving from the 'insider' point of view, they are closer to knowing what the real losses will be, and the strength of the franchise going forward.

[User 155598]

Regardless of if & when these insider purchases took place, financials offer real opportunity for substantial gains for the longer term invester

[Whisper OnThe Wind]

I think when ETFC gets up to $6, I'll get more. As for JPM, WB, C - I've gotten a bit more in the last couple months, when they were lower. My IRA isn't looking so bleak anymore.

[richjoy]

I want to thank user, locke, egan, and others for researching this article and providing the facts regarding insider purchases of financial shares...Internet at it's best!...well done!

[sumosama]

would like to see real data on buys...additionally, why would most insiders buy when they are getting massive options grants with reload provisions or outright stock grants?

[SergeBirbrair]

Why would insiders buy now?
There is another storm on the horizon,
$330,000,000,000 storm which wasn't even addressed yet:
arsclassaction.com

[SergeBirbrair]

I think the financials are just setting the bear trap.

[Col. J.L.G.]

This was an interesting article but please tell me why you would want to purchase a stock of a company that had about 200 plus percent more liabilities than assets? Why would you want to purchase a stock that was so inflation sensitive? If you look at the M-3 money supply vs the growth domestic product of the US you would have an inflation rate of more than 12 percent and climbing! If the banks would settle their derivative accounts and followed the banking laws about financial reserves you would find most of them are bankrupt! This goes for the brokerage industry too! The sub-prime bond problem is just starting in the US and is getting under way in Germany and Canada as well! We are over $9 trillion in debt and the US dollar is sinking into the sunset while the Federal Reserve just keeps cutting the interest rate and making it sink further! You cannot cure debt with more credit! Y'all better buy a lot of silver and gold to preserve what ever assets you have!

[Col. J.L.G.]

Sorry about that! It is GROSS DOMESTIC PRODUCT...

[Yan]

Does Karim Rahemtulla know what "insider buying" really means or does he check the latest data? I guess his claim was based on future data.

[Col. J.L.G.]

If the financial companies are a good buy just walk in one of these banks and try to get any amount of money out that you have deposited NOW! Let us say $5000, 10000, 20000, 50000 and see how long it will take you! You will get the song and dance about they have to order the cash or they just don't carry that much on hand etc!!!

[OJO Zafado]

I tend to agree with Serge. WB looks the most vulnerable. I do not see these financials bottoming until after the annual Summer sell off. We are going to see this bear market persist, after this bear trap rally past 1400 S&P ends. There is still time to get some puts on. BOA is big enough to weather the storm and will most likely rally strongly in the year end rally. JPM has capable leadership. C has a new CEO and he means business. All the deadwood will be out of Dodge at C in short order. Wells Fargo is very much exposed to the Calif. realestate market but was a little more selective than most in loaning money on realestate without equity. They have reasonably capable leadership as well. That leaves WB with their lame CEO who has embarrassed himself and the bank. Many times proclaiming the dividend secure in the months and weeks up to this past week's disasterous numbers and not just triming but brutally slashing the dividend by 40%. WB was still running their PicAPay mortgages ads(Neg amort) on TV just weeks before they reported. WB is the most vulnerable of the top 5! The leadership is either shell shocked or just really stupid! There is one place to gain a foothold in these financials NOW though. There are fabulous and relatively safe yields to be had on the existing prefferred subordinated debt shares of the better banks. USBPrE, JPMPrW, are good yielders. There are also some issues of BOA &WFC that are good as well. The WBPrS is up over 8% and that is a signal to stay away. These can be augmented with ADJ rate issuances like UBS-D, BAC-E & FNM-P for inflation protection. A position in DXKSX will also help offset any inflation issues. WB could easily break through $20 to the down size if they do not have a mangement change soon. Since the exposure of the LIBOR fixing fraud UBS-D has rallied sharply and may be best acquired on a pull back.

[JimHawthorne]

The financial sector is about as damaged as a drunken debutante at a frat party, and will take several quarters to recover from the lows it has yet to encounter...
There has been no flood of insider buying; when insider buying begins in earnest (after the buy-outs, failures and mergers), there will be so much of it that no debate about it will be required!

[startouch]

In my experience insider buying is a treacherous indicator that needs a lot of verification and deeper digging. Look at TMA. Chairman and CEO bought millions of shares at $20 just before it tanked to now $ 1.50, etc. etc. - Funny - Rahmatulla quotes the biggest banks with the least visibility/disclosures... I am with Wilbur Ross who publicly stated he is looking for small banks with a strong and growing cheap depositor base.

[fxtrader07]

tracking insiders and following them is great -but: regarding the "big" macroeconomic picture most insiders have no bigger insights than any other investor. They can very well assess whether their business (stock) is cheap REALTIVE to the past. They have ZERO advantage when it comes to evaluate the overall prospects - i.e. macroeconomic catastrophies that could hit, external shocks or the like.
The same holds true for general market downturns. If, for instance, the stock market experiences a prolonged overall P/E contraction (and this is an ongoing trend that WILL VERY LIKELY CONTINUE FOR SOME MORE YEARS!) then the insiders are getting caught buying too high as well.
And regarding banks: with all due respect, most high-lebvel managers there have made so many millions in absolutely insane and unjustified compensations over the past years that you can count on two things: first, most of them have lost any touch to the value of money, second even if they lost out on their insider buys, it would not make a huge difference to them anyway.
the only thing really worth watching ifs Buffet in this regard, but even he can be wrong. and, very importantly, he probably has far less ambitous expectations of returns on these investments than most other people have. I am pretty much certain that he is not targetting 15%+ annual returns with these purchases. rather, he might see an opportunity to put more of his vast cash to work at somewhat reasonable prices. but his time horizon is definetely longer than that of most retail investors
to me, the banks are too risky here, simply for the reason that I have no way of knowing what is hidden in their balance sheets until after it implodes. Therefore, I have little chances to manage my risk. Ther are other sectors and other stocks that offer value as well. I need not to gamble in banks

[User 181009]

"But could all these insiders be wrong?"

My answer is YES!! That's why those financial companies made a huge mess!

[Lilguy]

Either Karim does not know what he is talking about OR he is deliberately misleading readers of this blog. (He does not disclose whether he has a position in any of the companies he mentions.)

It may be appropriate to pull this contribution from this website.

[karchad]

Agree totally with the article. If you can't see beyond your nose, you avoid things like homebuilders and financials. If you're in it for the long haul, and have seen these things happen time and time again, you move your money into these sectors that have dropped 50-80%. Can't help but make great money in the next 5-10 years. It's the only way small-potato investors like me can beat the indices, and I do.

[orshoe]

Is it possible that insiders buy to avoid potential takeovers? Or even to be in a position to negotiate a better deal for a takeover/merge when it indeed happens, instead of leaving the decisions to the external forces? Just wondering. Just because insiders go on a buying binge may not mean the companies are doing good. There is no doubt that the economy will turn around and the market would do much better, in the coming years. But I think its just misleading, or even foolishness to follow the insiders, and lose sight of the fundamentals and market trends.

[fxtrader07]

@karchad: you obviously do not see beyond your nose. you just guess and gamble. You have seen this happen before? give me a break! A crisis about which everybody who is even remotely involved states that it is unprecedented. But you "know" and have seen it. what a crap.
And by the way: going by your logic you bought the nasdaq at about 2.000 back in 2001. great long-term investment. amzn slightly up, yhoo way down, nasdaq pretty much unchanged. not bad for 7 years time while the dollar's purchasing power has dropped by at least 25% due to inflation. potato, anyone?

[Hansolo]

Don't short AXP, WFC. You will get burned alive if you try to continue to double down. Though one could make money by trading around/flee quickly.

[banker666]

The CEO of Colonial Bankshares (CNB) just purchased a million shares @ $8 each. If you look back, he and many of the directors/officers were buying the stock all the way down. I assume they feel the market is undervaluing the stock and are getting more on the cheap. If there too many skeletons in the closet (bad loans they can't cover) I'm sure they would hold on (or sell like Countrywide's CEO Mozillo.)