Over the past year or so, I've been very bullish on Bank of America (NYSE:BAC). Shares have lost their luster with investors over the past six weeks or so, and have become very cheap after rocketing to $18 earlier this year. I've analyzed the business extensively and continue to do so, but one area I've thus far ignored was insider activity. I'm not normally one to place an enormous amount of importance on insider sells, but insider buys are interesting to me. To that end, we'll take a quick look at BAC's insider activity and why it is puzzling to me.
To begin, I took a look at BAC's consolidated insider activity at Yahoo Finance. You could see these same transactions at BAC's SEC filings site, but it is much easier to view them at the link above. Over the past several months, we see an enormous amount of selling from insiders. This would potentially be troubling, as you don't want management of your company jumping ship, but there is more to it than that.
As the old saying goes, there are a million reasons to sell but only one reason to buy, and I think we see that playing out here. Insiders regularly unload small portions of their stakes in companies they work for, and BAC's directors (and management) are no different. In particular, CEO Moynihan is regularly exercising some of his options, and it doesn't mean he doesn't have faith in BAC's ability to grow its share price or that he wants to reduce his reliance on BAC shares; it simply means he's trying to gain some liquidity with his BAC stake. In other words, I don't read into insider selling too much, because it is completely normal and commonplace for management and directors to sell some of their respective stakes at regular intervals, and that is exactly what we're seeing here.
What we're not seeing, and what I would like to see, is some insiders placing their own money on the table and buying. When a stock is battered like BAC has been over the past couple of months, it is nice to see a show of confidence from management. From the old saying above, the only reason you buy is when you think the price is going up, and I haven't seen that from BAC management. Yes, they have large stakes, but they're largely functions of compensation that was awarded to them for their employment as managers or directors of the company. I want to see CEO Moynihan and CFO Thompson take some of their substantial wealth and make open market purchases like the rest of us, instead of exercising their zero cost options and selling.
I believe that if we saw the management of the company take some proceeds of zero cost options that were exercised, of which there are many, and buy shares on the open market, we'd get a very nice pop in the stock. This vote of confidence would go a long way towards improving investor sentiment, as it would show the investor community that management believes the stock is cheap enough to spend their own personal money to buy it. Yes, the bank is trying to buy back shares with shareholder money, but that is nowhere near as powerful in terms of sending a signal to investors. Moynihan and Thompson are worth more money than they'll ever need, and I'd like to see them use some of that wealth to show shareholders that they actually believe in BAC enough to place their own money at risk. We haven't seen that, and it is not helping investor sentiment.
I think management of this company is doing a good job of positioning the bank for long-term profitability. If you've read my articles, you know I think Moynihan is one of the best CEOs in the industry and the job the management team has done cleaning up the mess it inherited has been exemplary. I just wish the same managers would place their own money at risk like the rest of us, and show the investing community they believe in BAC enough to buy shares on the open market. Owning zero cost options is not the same as placing personal wealth at risk, and we need to see that from BAC insiders. I don't think it's too much to ask to have management's fortunes tied to ours.
Disclosure: I am long BAC. 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.