8/16/2011 8:07 PM ET|
6 stocks insiders are snapping up
While recent volatility sparked panic selling, those in the know were buying. Among the names insiders thought were bargains: Morgan Stanley, Hasbro and Berkshire Hathaway.
Good news: Stocks are stabilizing.
But is this just the eye of the storm, or was the frightful first fortnight of August merely a bull market correction that's almost over? The question is critical, because the latter would mean it's a good time to snap up bargains in the market.
I'm definitely in the "almost over" camp for a simple reason: Corporate insiders -- the guys and gals with the front-row seats on the economy -- are back in the market in a huge way.
"There's been a dramatic shift towards buying," says Richard Uhl, a research analyst with Thomson Reuters. Insiders have been snapping up so much stock, he says, they're now as bullish as they were during those bleak moments in February and March of 2009 -- when the market was bottoming after another monster sell-off.
That's a sign that those buying stocks in the wake of the pullback are right -- and in case you want to join in, I'll name several blue-chip plays that insiders are buying later in this column. First, let's take a deeper look at what the insiders are telling us about the road ahead.
Insiders chasing profits
Of course, the big fear among investors is that the economy is now flying at stall speed. Many pundits think job growth is so low that consumers will cut back on spending. Companies will see demand drop and cut jobs, leading to a vicious cycle that sends the economy into a tailspin. Goldman Sachs economist Jan Hatzius just raised his odds for a U.S. recession to 1 in 3.
But the insiders' voluminous buying says that isn't in the cards. "As the markets crashed, insiders were just seizing the opportunity to snap up shares," says David Coleman of Vickers Weekly Insider, published by Argus Research. "The fundamental reason they are buying is they think those shares are undervalued." In other words, stocks look cheap compared with expected profits, because the dire recession scenario isn't going to play out.
At least some Wall Street analysts agree. "The current S&P 500 market price is implying a reduction in earnings that we find unlikely," Barclays strategist Barry Knapp wrote Monday morning. "We believe the macro outlook is stabilizing."
But what about the other big fear, that European banks will blow up because of exposure to the debt of over-borrowed countries, like Greece and Italy? I'll take the big insider purchases by top execs at JPMorgan Chase (JPM, news) ($6.8 million) and Morgan Stanley (MS, news) ($3.8 million), not to mention lots of regional U.S. banks, to mean that those fears are overdone.
The doomsday scenario is that European banks will blow up in a "Lehman moment," which would seriously harm U.S. banks because the global financial world is so interconnected. But U.S. bank insiders are saying it's not going to happen. "We see some signs that policymakers in Europe are having a degree of success," agrees Knapp.
For those who want some hard numbers on the insiders' buying overall, here's my summary of the big-picture data provided by Thomson Reuters.
For just the first third of August (through Aug. 10), insider buying jumped to $112.6 million, more than the average monthly buying of $104 million during 2010 and through the end of July of this year. Meanwhile, insider selling for the first 10 days of August fell to $546 million, well below the average of $876 million for a third of a month during 2010 and 2011 through July. The result: The Thomson Reuters sell-buy ratio fell to 4.85 (lower is bullish) in early August, a level not seen since the bear market lows of February and March 2009. In those months, the sell-buy ratio stood at 5.1 and 3.9, respectively, and marked a buying opportunity.
Of course, insiders are known to buy for the long term, which means they often buy in a little early. Their purchases don't call the exact bottom of the market; no one can do that. You should be aware that Michael Painchaud, of Market Profile Theorems, who has made a few good market-timing calls lately, thinks stocks could fall back again and test the recent bottom. But there's no doubt that insiders seem bullish and are buying with a ferocity last seen during the last market bottom.
Here are some well-known, large-cap, brand-name companies where insiders were recently snapping up shares. Most of these also pay decent dividends. So if the insiders were early, at least you'll get paid to wait.
Until recently, there had been nothing but selling by Morgan Stanley insiders -- even as the stock slid precipitously this year from highs around $31 in February to $22 to $23 range by June. But when the stock broke through $21 in the August swoon, the selling stopped and the floodgates of insider buying opened. On Aug. 4, CEO James Gorman bought 100,000 shares for a little over $2 million. Other execs, including CFO Ruth Porat, bought more than $1.6 million worth.
All the buying happened between about $20 and $20.62. Now the stock is even lower, at around $17.50. Does this mean that insiders are stupid and you should not follow them? No, it just means that these insiders did what insiders normally do: They bought early. The sheer size of the buys here, and the reversal from years of selling dating back through 2008 (excluding one purchase in January 2010), add up to a strong bullish signal.
Morgan Stanley gets lots of revenue from asset management and investment banking, or assisting with stock, debt and initial public offerings. Investors fear this business will dry up in a recession and bear market. But through their massive purchases, insiders are saying relax -- the threat isn't that serious. Anton Schutz, manager of the Burnham Financial Industries Fund (BURFX) agrees that Morgan Stanley stock looks "incredibly cheap."
By early August, the "A shares" of Berkshire Hathaway (BRK.A, news) had fallen almost 24% to $100,265 from $131,463 in late February. In the selloff, a director put more than $800,000 into the stock at $105,416 a share. This confirmed what a lot of Warren Buffett investors and fans, including myself, have been saying recently: Buffett's stock looks too darn cheap.
Berkshire's reported book value at the end of the second quarter was $98,716, which means that the stock currently sells for about 1.09 times book value. Berkshire stock historically trades for about 1.7 times book value, as a mean, and the current level is about as cheap as Berkshire has gotten in past decade, says Barclays analyst Jay Gelb.
He has an "overweight" rating on the more affordable "B" shares of Berkshire Hathaway (BRK.B, news) which recently sold for around $71.90. Gelb's 12-month price target is $85. But if the stock returns to its average price-to-book value of 1.4 since the 2008 financial crisis, the stock will go to $100.
Berkshire shares have been hit because its reinsurance business, which provides insurance for insurance companies, has been hurt by a slew of natural disasters around the globe. Plus Berkshire Hathaway has big exposure to financial-sector stocks, which are down a lot in this pullback. The insider buying affirms these will turn out to be just temporary issues. (For a look at other stocks you get exposure to when you buy this one, read "Buffett's 7 best stocks today.")
Toymaker Hasbro (HAS, news) started its summer swoon in July, when it announced a second-quarter earnings miss. Insiders, including CEO Brian Goldner, bought more than $550 million worth of stock in a pullback that month, at around $39. Then, as the stock slipped to near $37 in the August weakness, one insider bought even more. Despite the stock weakness, insiders are betting the stock will morph into a powerhouse, just like one of the Transformers action figures the company sells.
A big problem last quarter was higher costs. But Hasbro says it has been spending a lot on The Hub, a new TV network, and that the investment should begin to pay off as viewership builds. The company predicts continued robust international sales growth, and domestic gains as more movies based on Transformers action figures roll out over the next few years. It's also launching two new lines: toys based on Sesame Street and a line of construction-related Transformers toys called Kre-O.
"We see these purchases as indicative of management's confidence level in its future earnings capacity," says Goldman Sachs analyst Michael Kelter. With Hasbro, you collect a 3.2% dividend yield while you wait.
The casual-dining restaurant chain Ruby Tuesday (RT, news) has been hit by a triple whammy. Disappointing results for the first two quarters of this year already had shareholders asking for the check. Then, naturally, the stock got caught up in the panic selling in August.
The upshot: Ruby Tuesday stock has fallen more than 48% from highs of $15.57 around the start of the year, to trade recently for about $8. Insiders are saying enough is enough. They've purchased almost $3 million worth of stock between $7.75 and $8.96.
CEO Sandy Beall blames recent earnings weakness on heavy advertising and competitive pricing by rivals like Red Lobster and Olive Garden, divisions of Darden Restaurants (DRI, news) and privately-owned Applebee's, challenges he predicts won't be letting up soon. To fight back, Ruby Tuesday is rolling out new restaurant concepts like Marlin & Ray's, Wok Hay, Truffles Grill and Lime Fresh Mexican Grill. Many of these are going in at smaller locations that require less investment.
Ruby Tuesday, which has more than 830 restaurants in 46 states and 14 foreign countries, also says it will continue cutting costs to support cash flow, which it will use to buy back shares. Credit Suisse analyst Keith Siegner thinks this could reduce the share count by 40% over the next three years, one reason he has a $14 price target on the stock. David Coleman, an insider expert at Argus Research, says it's very bullish that Ruby Tuesday's CEO was recently a buyer -- given that he was such a heavy seller last year and earlier this year.
Despite the overall market bearishness in early August, Kraft Foods (KFT, news) shares rallied valiantly for a moment on Aug. 4, on news that the company plans to split itself up. Kraft shares jumped to over $36 from under $34 that day. Split-ups are often seen as a big positive, because they help unlock the value of disparate product lines and divisions embedded inside a larger company.
Alas, the August market depression soon overwhelmed Kraft bulls. The stock fell below $33 after the brief rally. Now, any strength due the stock related to the split-up is only temporarily being stifled by overall market conditions. At least that's what one director seems to think -- buying $1 million worth of stock on Aug. 9 at about $33.50.
Kraft wants to split itself into two parts within a year. One would be a higher-growth global snacks company with good exposure to emerging markets, containing Kraft brands like Oreo, Lu biscuits, Cadbury and Milka chocolates, Trident gum, and Tang powdered drinks. The other would contain North American grocery brands inside a lower-growth but more-stable company paying a decent dividend. Brands in this company would include Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Jell-O desserts and Miracle Whip. "We believe that the company's split up into two companies will improve management's focus," says Credit Suisse analyst Robert Moskow who has an "outperform" rating and $41 price target on the stock.
As a company that sells test equipment, motors, switches, valves and process-automation tools to industry, Emerson Electric (EMR, news) was a natural to get hit hard by worries that the U.S. economy is slipping back into recession. All told, Emerson stock has fallen to about $46 recently from above $60 earlier this year. In the pullback in early August, insiders bought more than $2.1 million worth of stock in the $43 to $47 range.
The buying makes sense. Emerson has bet heavily on emerging markets, where growth should remain fairly strong, whatever happens in the U.S. About 19% of revenue came from Asia last year. Morningstar analyst Daniel Holland cites Emerson's "established presence in emerging markets" as one reason it should do better than other companies just trying to move in there.
Plus the company has a management team that's "adept at weathering various financial climates," says Holland. And it has done a solid job of returning cash to shareholders. Over the past three years, the company has given shareholders nearly $5 billion through dividends and share repurchases, a practice that's likely to continue. Goldman Sachs analyst Terry Darling cites continued share buybacks, strong cash flow and a 3% dividend yield as reasons justifying a "buy" rating and $56 price target on the stock.
At the time of publication, Michael Brush did not own or control shares of any fund or company mentioned in this column. Brush is the editor of Brush Up on Stocks, an investment newsletter.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
VIDEO ON MSN MONEY
As stated earlier, three simple ways to react to stocks plunge: 1. Hold and do not react to it. 2. Do not move portfolio holdings while market is down. 3. Readjust holdings when stocks are functioning with less or no volatility.
To do otherwise would be giving stock gamers openings to cash in.
No one, not even executives, know if the stock market is going to rise or fall next week. They do, however, know if their company's stock is undervalued or not.
The high rate of insider buying shows that they believe their company's shares are undervalued and worth buying; the short-term behavior of the stock market doesn't even matter - and real professionals don't even try to guess it. That's why executives can buy stock but still say "there could be another crash" at the same time; this is not a contradiction in their thinking.
Google "frost finance culling the sheep" for more on this...
Ron Paul is the only candidate telling the whole truth. (Herman Cain is the most educated fiscally, but he cannot be the most frank and continue his candidacy.)
The Fed is taking care of their Goldman Sucs buddies and screwing the public. "Wage inflation" is the solution, not the problem, unless you are a parasite on the Federal Reserve, a hedge f\und prostitute or a big busn. feudal lord. Exile the Sheriff of Nottingham who occupies 1600 Pennsylvania Avenue and all his minions (Dems & Repubs) on Capitol Hill.
The saddest aspect of this whole story further underscores what's wrong with this country. Those most responsible for our economic and political woes are the same scoundrels benefiting from that same turmoil. Wall street and D.C.'s on the take henchmen have been so insidiously intertwined for so long that when the roof began to cave in, everyone started scrambling to save their own hides.
The major financial and brokerage firms, institutional and elite individual investors, hedge fund mangers, et al lost control of the profit train, and now the regulators and investigators are forced to do their jobs. Well ladies and gentlemen, roll up your sleeves and don your protective gear, because you have a toxic mess to clean up. And you can start with cleaning your own houses.
I don't have a problem with Ruby Tuesday, Kraft, or Emerson...basically any company that actually produces goods and services who buy shares in their own piece of the pie. At least they are responsible for making the pie. The better the pie- the more sales and revenue, and the resulting profits and prosperity are EARNED.
However, contrast that with the Morgan Stanleys of the world. They cannibalize from legitimate industries some of the best and brightest young minds that would otherwise become researchers, IT professionals, mathematicians, educators, etc. to become high stakes gamblers who produce absolutely nothing, except the misery that 99% of America (and the world) has to deal with. And please don't kid us with the "we provide a valuable service to markets and the economy" line. Yes, brokerage firms and investment companies are necessary for a capitalist private industry economic model, but the financial services industry has (once again) grown completely out of hand, and somebody needs to reign in the greed and madness.
But the real trillion dollar question is can we have greater than a 2 yr memory and keep this from happening all over again, because the next time may be the down fall of civilization as we know it? Wake up America!
I concur that market timing and bottom picking is a hopeless exercise, but this author seems to doubt his own conviction, in the very next sentence!!!
"Their purchases don't call the exact bottom of the market; no one can do that. You should be aware that Michael Painchaud, of Market Profile Theorems, who has made a few good market-timing calls lately, thinks stocks could fall back again and test the recent bottom."
Why should we be aware Painchaud's latest opinion, you just claimed that 'no one can do that'!!
Geez, re-read your work before hitting 'Submit', please!
It looks to me like somebody is dropping the ball with Berkshire. The second from the last paragraph says analyst Jay Gelb is calling B shares overweighted (he's really fighting upstream on this call, BTW). Even if I agreed (I don't) the implication is B shares are overweight, but A shares are not. That's the way I read it, anyway. That would be rediculous since A shares are deliberately tagged at a value of 1500 B shares. If there truly was disparity between the two, there would be a terrific opportunity for arbitrage.
That would have been some article.
Really? Stabilizing? Because we failed to address the extravagant govt spending, my ultra-shorts have gone up 30% in the last few weeks. Happy days are here again?
This article is DREADFULLY PATHETIC in its desperate tone to riegn in anyone with money to keep the feeding of their casino alive....sheesh!
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