Bank execs have been smart stock buyers in 2016
CEOs of big banks are routinely rewarded millions of dollars in shares each year as part of their overall compensation. Typically, these CEOs already hold a large percentage of their assets in their own stock. Most are loathe to buy more shares in the open market because of concentration risk.
Nonetheless, there are times when bank stock prices fall so far and so fast that even bank execs holding highly concentrated positions cannot resist the urge to buy shares on the open market.
Bank stock prices have been on a roller coaster in 2016 creating two buying opportunities. The first was early in the year when prices fell abruptly. And the second was for a day or two in June immediately after the Brexit vote.
Despite the buying opportunities, only a few bank CEOs swooped in to buy shares on the cheap in 2016. Here's a list of four banks where executive insiders bought shares of their own bank stock in the open market in 2016. All insider trade data are from OpenInsider.com which draws its data directly from the SEC's Form 4 report.
These insiders clearly saw buying opportunities and reaped the benefits. The best short-term return (42%) has been realized by Richard Evans of Cullen Frost Bank (NYSE:CFR) in Texas. Evans' purchase is especially compelling and here's why: The most frequent explanation an insider uses for selling stock is the need to diversify assets as the insider nears retirement.
In Evans' case, he actually retired not long after he made the insider buy. Clearly, seeing a great buying opportunity, Evans forked over nearly $2 million to buy 40,000 shares in the open market. As of September 27, he shows a nice gain of nearly $800,000. Not bad for a seven-month hold.
JPMorgan Chase's (NYSE:JPM) Jamie Dimon bought the most shares. Perhaps the best thing about Dimon from a shareholder view is that he never sells shares except to settle taxes after receiving a stock grant or exercising options. He now holds more than 6.7 million shares valued at $440 million. Clearly, he's "all in" and that's what investors like to see in their CEOs.
Dimon purchased 500,000 shares on 2/11/2016. JPM's stock price ended that day at $53.07, a few cents below his purchase price. After the public learned of the purchase, the next day JPM shot up $4.42 or 8.3%.
When KeyBank's (NYSE:KEY) Beth Mooney bought 20,000 shares in January so too did all the members of the bank's board. Director purchases in the open market are uncommon. KEY's directors' stock purchases ranged from a low of 7,000 shares to more than 20,000. Those are big numbers for individual bank directors. Clearly, this board stepped up to make a statement as well as try to make some money.
In KEY's case, the board and CEO obviously intended to make a statement specific to investor complaints that their recently announced acquisition of First Niagara was ill-advised. Time will tell if the directors prove right in their buy decision but investors have to feel good about their confidence.
Michael O'Neill is the chairman of Citi (NYSE:C). (Unlike most big banks, Citi splits the CEO and chair roles.) He's a rare bank director. The vast majority of directors of US banks lack any experience in banking prior to their board appointments. O'Neill is clearly the exception; he was already a highly respected banking expert prior to joining Citi's board. When an insider with his knowledge and stature buys, other shareholders should pay heed.
It's worth highlighting that O'Neill not only bought stock in 2016 but he also bought 28,700 shares on the open market on August 24, 2015 for $50.16 a share. The 2015 buy came just about a month after Citi's share price fell $10. That's the kind of leadership that sends a strong message to not only fellow shareholders but bank employees who worry when the stock price plummets.
When do bank insiders buy stock in the open market?
There would appear to be only one reason an insider buys stock in the open market: confidence in the bank's future.
Bankers are an especially cautious breed. They operate a business where a 1% return on assets is considered good. The margin for error is small. Their business is subject to not only management and governance errors but also directly linked to the overall state of the economy which is outside the bank's control. There's a reason good bankers tend to be conservative not only as lenders but in managing their own investments.
Sometimes, bank stocks fall for reasons that don't make sense. Such times create buying opportunities for confident insiders.
Although, there is no magic formula for determining when an insider will step up and buy more shares, the next chart is an attempt to create a simple model for determining when the insiders at JPM, C, CFR, and KEY made their purchases.
The chart provides each stock's peak end-of-day price for the 12 months prior to the insider's purchase. The most important column is the last one which compares the percentage drop in stock price from peak to the purchase price.
The insiders bought shares at prices ranging between -24% and -39% below peak 12-month prices. The average was -31%.
What about Wells Fargo (NYSE:WFC)?
No Wells Fargo bank executive has bought shares in the open market during the past two years based on a review of both OpenInsider.com and Yahoo Finance.
However, two bank directors made small purchases earlier this year. Source: OpenInsider.com
As background, Pena is a politician who served in the Bill Clinton administration and has been on the Wells board since 2011. He bought 85 shares in March. It's an odd number.
Quigley, a former Deloitte partner, has been on the board since 2013. He bought 2,000 shares on May 3 of this year. Quigley only owned 150 shares of WFC prior to his purchase according to his SEC Form 4, dated May 4. Just to double-check Quigley's holdings since they seem so low, especially for a three-year director, a review of the Wells Fargo 2016 Proxy confirmed that he held only 150 shares in WFC shares at the time the Proxy was filed.
A complete list of all WFC insider transactions for the past two years can be found at OpenInsider.com.
Not unlike other Wells Fargo executive insiders, neither CEO John Stumpf nor COO Timothy J. Sloan bought shares in the open market during the past two years. Both, however, have sold shares in the open market during the past two years at prices ranging between $48.16 and $56.
Will WFC execs soon buy shares? If so, at what price?
Investors are worried about WFC given recent revelations about sales improprieties. As a result, the stock price has lagged peers. Investors are divided about the immediate future of WFC shares.
One view is that the sales impropriety concern is overblown. Consequently, so the logic goes, with blood in the streets, now is the time to buy.
The other view is that there is simply too much uncertainty and that investors should exercise caution and remain on the sidelines until an "all clear" sign appears.
One such sign would be insider buying, particularly coming from top executives.
Wells' stock hit an all-time end of day high of $58.52 on July 22, 2015. As of September 27, 2016, the stock price was $45.09, representing a decline of -23%.
Returning to the second chart in this analysis, insiders at other banks did not step up and buy shares in the open market until their stock prices had fallen in price somewhere between -24% and -39% from 12-month highs. That's obviously a big range but it gives investors at least a model for conjecturing when WFC insiders might step up and buy. Assuming they do buy.
If WFC insiders act in the same manner as seen at JPM, KEY, CFR, and C, then it is possible that they may begin buying shares at a price as high as $44.48 and as low as $35.70.
However, it would be surprising to see Wells Fargo insiders step up and become buyers at the high end of the range. We know this because Wells' shares fell to an intraday low of $44.50 on both February 11, 2016 and June 27, 2016; no WFC insiders took the bait and bought more shares during those two times. If Wells insiders are to buy shares, the likely price based on executive insider transactions at the other four banks is a range between $36-40.
Wells Fargo is without question one of the nation's most consistent, high performing banks. Investors have recognized this fact for a long time and that's why the bank has historically commanded valuation multiples (P/E and P/B) at the top end of the industry.
Even after a -23% decline in stock price since July 2015, Wells Fargo still has a price to book value 25.6% higher than peer commercial banks (1.29 versus average of peer banks of 1.03; source: Ycharts, 9/27/2016). Should WFC's stock price decline to peer price to book value average, the implication is that WFC's price would fall to $36.17. This number is at the low end of the conjectured insider buying range.
Given significant uncertainty, especially during a heated election season when politicians are looking for headline issues, investors would be wise to closely monitor WFC insider activity.
Based on the experience at other banks, the best "all clear" sign is an open market purchase by key senior executives. In Wells' case, a purchase from Warren Buffett/Berkshire Hathaway (NYSE:BRK.A) would obviously serve the same purpose. Until there is an "all-clear" sign, potential buyers of WFC shares should recognize that the bank does not provide the margin of safety to justify current lofty multiples.
Disclosure: I am/we are long JPM, CFR.
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.