Immelt's Purchase Of GE Stock Is A Good Sign But...

| About: General Electric (GE)


Jeff Immelt recently purchased $3.6 million in stock in 2 separate transactions.

In the 12 months following a CEO open-market purchase, the stock outperforms similar stocks by 1.5%.

In the 12 months following a CFO open-market purchase, the stock outperforms similar stocks by 6.5%.

General Electric (NYSE:GE) recently made news because of the large purchases of stock in the open market by the CEO, Jeff Immelt. On January 27th, he purchased roughly $1,000,000 of stock and on March 3rd, he purchased another $2,600,000 of stock. This suggests the stock should outperform similar companies by 1.5% over the next year. This is certainly a good sign but a purchase by the CFO, Jeff Bornstein, would be a better sign for the stock.

In June 2013, Bornstein was named the CFO. Jeff Bornstein has not made an open market purchase of GE stock over the past two years. The previous CFO, Keith Sherin, has also not made an open market purchase of the stock in the past two years.

A recently published academic research article concluded that investors should pay much more attention to CFO purchases than CEO purchases. The study looked at CFO and CEO purchases between 1992 and 2002 and reached two surprising conclusions about the importance of CFO purchases:

  1. After public disclosure of both CFO and CEO purchases, the CFO purchases led to a nearly 5% better cumulative return over the next 12 months than CEO purchases and 6.5% better than stocks with similar characteristics but no purchases.
  2. Stocks with CFO purchases were roughly three times more likely to have positive earnings announcements in the 2 earnings releases following the purchase.

Another interesting conclusion reached in the research is that there is no significant predictive value in either CEO or CFO sales. This proves the saying 'there are many reasons to sell but only one reason to buy'.

This academic research is directly applicable to trading and investing because it verifies the continued significance of insider purchases.

The research was authored by Weimin Wang, Shin Yong-Chul, and Bill B. Francis. It was published in the Journal of Financial and Quantitative Analysis.

The last time Immelt made an open market purchase was on March 1st, 2011 when he purchased $844,000 of common stock. Over the following year, GE stock underperformed a peer group of stocks in the iShares Global Industrials ETF (NYSEARCA:EXI) by 4%. With that said, this is yet another reassuring data point suggesting good things for GE over the next year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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