Get ahead of the market by watching stocks traded by insiders
ONE stock market indicator that doesn't get enough attention is the purchase or sale of company shares by insiders.
Most investors -- professionals and amateurs alike -- seem to pay scant attention to these transactions.
I think such trades give useful cues for stock picking and I suggest the following guidelines for interpreting them.
Purchases by chief executive officers, chairmen and presidents have more predictive value than purchases by directors or lower officers.
Those who sit in the corner office usually have the most complete picture of how a company is doing.
Large purchases count for more than small ones, of course.
In this regard, value is a better measure than the number of shares. An executive who buys 100,000 shares of a stock selling for pennies hasn't really put big money on the line.
Open-market purchases are more significant than the purchase of shares by exercising stock options. In many cases, the terms of an option are such that an executive would have to be a dolt not to exercise it.
Watch for reversals. When an executive who has been selling shares turns around and starts buying, that can be a bullish sign. It's also noteworthy when someone who has been accumulating shares shifts gears and starts to shed them.
Finally, try to determine how an insider has done with his or her purchases and sales in the past. Some executives have a much better feel for the market than others.
Here are the companies in the Standard & Poor's 500 Index, whose insiders purchased the largest dollar amounts of stock in the three months ended September 1: Legg Mason, EMC, Akamai Technologies, Monsanto and CME Group.
Legg Mason, a Baltimore-based money-management firm, topped the chart with a one million-share purchase by one insider, valued at $30.4m. This insider was not an individual but an investment firm, Trian Partners.
Legally, an insider is an officer, director or holder of at least a 5pc stake in a company. Trian Partners qualifies as a Legg Mason insider because, with its recent purchase, it owns about 7pc of Legg Mason stock.
Nelson Peltz, the founding partner of Trian, is a man who likes to buy into companies when they have problems, so he can build his positions cheaply.
In Legg Mason, I think Trian made its move at a time when the money-management industry was near the point of maximum pain (I should know.)
Not surprisingly, Legg Mason's glory years were 2006 and 2007, when Wall Street was high and mighty, not cringing and crying.
The stock's high was about $136 in 2006; today, it fetches about $28. The company had a massive loss of $1.97bn in 2009, equal to $13.99 a share, but is back to profitability. I think a comeback is likely.
The second-largest insider purchase was $12.4m at EMC and the buyer was none other than the company itself, buying back 161,000 shares in late August.
I like to see companies buying back their own stock. Based in Hopkinton, Massachusetts, EMC is the world's biggest maker of storage computers. Regrettably, I can't get too excited about EMC's stock.
Even as the company was buying shares, 10 officers and directors sold some of their personally owned shares in August.
At 24 times the past four quarters' earnings and 16 times estimated 2010 earnings, the stock seems about fairly priced.
At Akamai Technologies, three insiders have purchased $3.6m of stock in the past three months. The big purchase was almost 48,000 shares snatched up by Peter J Kight, managing partner of Comvest Investment Partners in New York City and an Akamai director.
Today, the shares hover at about $50, which works out to 47 times earnings; too high a multiple for my taste.
Better, in my opinion, is Monsanto. At 22 times earnings, the stock is suitable for growth investors, though a little pricey for a cheapskate like me. Two top Monsanto executives bought $3.5m of stock in the past three months.
The purchases beefed up the already substantial holdings of Hugh Grant, chief executive, and Carl Casale, chief financial officer.
Rounding out the top five is CME, which operates the Chicago Mercantile Exchange.
There, two insiders bought $1.5m of stock. The big buyer was William Shepard, a director.
He had sold some shares in 2006 and 2007, when they were much more expensive. This is his first significant open-market purchase since then.
At 18 times earnings, CME Group looks like a reasonable purchase to me.