I happened to see an article recently that suggested IBM (NYSE:IBM) was 33% undervalued at the moment. If that’s the case, you would think CEO Ginni Rometty would be buying IBM stock.
But she’s not and that ought to be very troubling if you own International Business Machines stock. Here’s why.
I’ve said it many times, insiders sell a stock for many reasons: daughter’s education, son’s wedding, a once-in-a-lifetime vacation, second home, etc. Most times, insider selling is meaningless.
The same can’t be said for insider buying. When insiders make open-market stock purchases, the only reason is that they think the stock is cheap. That’s it, that’s all.
A Classic Example
If you’re unfamiliar with Acreage, it is the multi-state cannabis producer that agreed to be acquired by Canopy Growth (NYSE:CGC) for $3.4 billion, conditional on the U.S. federal government legalizing the Schedule 1 drug.
The legalization of cannabis on the federal level must happen within the next seven years or the purchase agreement vanishes into thin air.
Between investors worrying that Acreage agreed to a deal too hastily, Canopy is facing some of its own issues including former co-CEO Bruce Linton being relieved of his duties, and cannabis stocks, in general, taking it on the chin, the top cannabis ETF by assets, the ETFMG Alternative Harvest ETF (NYSEARCA:MJ), is down 35% in the past three months. Acreage stock was feeling the heat.
From the beginning of January through July 15, the day Murphy made his big stock buy, Acreage stock had lost 31% of its value. In the three months since it’s lost another 50% of its value. It’s now down 64% year to date through Oct. 8.
Murphy, at least on paper, has lost a million dollars over 90 days. I’d keep an eye on more open-market purchases. If he’s buying, you absolutely know he thinks Mr. Market’s got it wrong.
Insider Purchases and IBM Stock
As I said in the beginning, someone out there in the investment media think the IBM stock price is absurdly cheap. I don’t. I believe that Ginni Rometty and the entire IBM board are incredibly out of touch and need to be replaced for the sake of IBM shareholders, but that’s a subject for another day.
Let’s assume for a second that IBM stock is 33% undervalued. At current prices, this would suggest it’s worth $184.
If so, why isn’t Rometty buying on the open market?
In the latest fiscal year, Rometty earned $6.8 million in non-stock-related compensation. The amounts were similar for the previous two fiscal years. She could certainly afford to.
And while Kevin Murphy’s relationship to Acreage goes far deeper than just being a hired gun, his annual pay of $375,000 pales in comparison to Rometty’s take-home pay.
Here’s what Murphy had to say about his large purchase in July:
“With the downturn in industry stock prices recently, this was an opportunity to show investors that Acreage management is committed to creating long-term shareholder value,” said Murphy. “We remain focused on executing on our strategic plans, including fully leveraging the power of Canopy’s IP.”
As for Rometty, she’s filed five Form 4’s in 2019, the latest on Aug. 9, when she acquired 416 phantom stock units that will be paid out in cash once she leaves the company. She’s made no stock purchases on the open market in 2019.
In 2018, after IBM bought Red Hat for $34 billion, Rometty bought $1 million of IBM stock on the open market at an average price of $117.51 a share, the first time she had ever done so in her 38 years at the company.
So, she either got motivated to buy on the open market to signal her belief in the expensive acquisition, or she felt IBM stock was cheap at $117.
Given it was her first-ever purchase of IBM stock on the open market, I’m going to go with the former reason rather than the latter.
Now that the IBM stock price has gained 20% since Rometty made the large purchase, the fact that she’s not buying more suggests either she doesn’t believe it’s still cheap or she doesn’t want to spend any more of her own money buying the company’s stock.
Either way, it’s bad news for IBM shareholders.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.