Insider Trends in the Financial Sector 38 comments
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By Karim Rahemtulla
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.
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This article has 38 comments:
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.
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.
Thx jegan ;-)
Thx jegan ;-)
Thx jegan ;-)
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.
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.
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
check out the insider purchases here. Link should put you to BAC info and see for yourself
www.insidercow.com/
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.
There is another storm on the horizon,
$330,000,000,000 storm which wasn't even addressed yet:
arsclassaction.com
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!
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
My answer is YES!! That's why those financial companies made a huge mess!
It may be appropriate to pull this contribution from this website.
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?