The market is giving us great buying opportunities. But if you want added confidence in putting money to work, let’s look at which corporate insiders are buying their own stock
On Wednesday, February 12, 2020, the Dow Industrials hit an all-time high of 29,551.42.
Since reaching that level, the COVID-19 pandemic and our containment response to it have shut down large swaths of the global economy. Despite last week’s historic rally, the Dow is still down an incredible 27% from its February high as I write.
Specific sectors, like airlines, cruise lines, restaurants, and oil have fared much worse than the broad market. Across those sectors, dozens of companies have suffered 75%+ declines in market value.
By many measures, the financial markets are the most volatile they have ever been. Schools have shut down. Millions of businesses are on the verge of going under. Unemployment is soaring.
It’s safe to say investor fear is off the charts.
***In the past few weeks, you may have asked yourself if it’s time to heed Warren Buffet’s advice to be “greedy when others are fearful” and start buying cheap stocks
At some point, these key facts might have come to mind:
Stocks have climbed an average of 6.6% per year (after inflation) per for over 200 years … through panics, world wars, and recessions.
From 1928 to 2019, we had 25 bear markets. After each one, stocks went on to hit new all-time highs. The stock market’s record of recovering after tough times is perfect.
In other words, it pays to bet on America. It pays to bet on human grit and ingenuity.
With all this in mind, where should we go bargain hunting?
What’s the best indicator for zeroing in on cheap, depressed stocks ready to soar in value?
There’s no absolute best, “one size fits all” answer to that question. But at the top of our list, you’ll find three words … “heavy insider buying.”
If you’ve been in the markets for a while, you’ve probably heard corporate insiders sell their stock for various reasons: Portfolio diversification … paying for a child’s college … paying for a divorce … paying for a beach house … etc.
However, there’s only one reason corporate insiders BUY their company’s stock: They think it’s about to go up in value.
Corporate executives and directors have the best information on their companies’ prospects and financial conditions. They know what deals are likely around the corner … they see shifting business conditions ahead of regular investors. Insiders typically see boom times and bust times way ahead of outsiders.
Corporate insiders must report their buying and selling activity to the government. This allows outsiders to peak over their shoulders and get clues that an executive team believes a stock price increase is imminent.
So, what are the some of the most compelling insider buying activities over the past few weeks?
Fortunately, we have an expert who has sunk hours of research into answering this question and is willing to share his findings with us — Neil George, editor of Profitable Investing.
Regular Digest readers know Neil as a master income investor, helping his subscribers find high-quality yield, whether that be from dividend stocks, bonds, REITs, MLPs, or other instruments. Over the past week, Neil has been diving into corporate filings, looking for notable cases of heavy insider buying.
So, at this point, I’m going to turn it over to Neil to see what his research has dug up. This is about as close to insider-trading as we can legally get. Let’s take advantage.
***Time to think like a robber barron
The 19th century was a time of massive development in the US economy. From major industrial companies to regional and national railroads — the nation’s modern economy was largely built on the foundation of the work and investment from a collection of entrepreneurs and investors with a vision of what could get done.
And during market strife and even stock market crashes — these same business and investment leaders knew the true value of underlying assets of companies and so were eager to buy as others were filled with fear of blood in the streets.
Cornelius Vanderbilt owned and gained control of numerous vital railroads including New York Central and used distressed economic times to expand his networks and empires. Jay Gould loved market strife as it gave him the ability to buy on the cheap and gain control of more companies including Union Pacific and Western Union.
Andrew Carnegie not only built a dominance in steel with U.S. Steel — but went on to control vast fortunes in industrial and other companies. John Rockefeller would do the same with his oil and related rail and pipe to transport it and used economic or market weakness to add to and expand his empire.
And J.P. Morgan dueled with some of the folks just mentioned as he built up his collection of financial and bank companies as well as controlling stakes in countless companies including AT&T.
What all of these folks and many more like them have in common is that they knew that the time to buy is when others are selling. And they got to know extremely well the companies that the stocks that they were buying and owning were indeed worth when they bought them with the knowledge of what they would be worth as strife subsided and they could direct them to stronger positions in their respective industries.
***Know thy company
No one knows a company better than the CEO, the CFO and their C-suite management team along with their board of directors. They know what the assets are worth, what their employees are capable of, their customers as well as their financial standing with their creditors. And they know where the bodies are buried and what skeletons might be hanging about the closets.
This is why I always need to see the C-suite and board members owning shares of their companies that I recommend in Profitable Investing. And I get more enthused when I see these insiders of companies not only owning stock — but putting more of their own cash into buying more stock in the open market — particularly during times of market strife. And I’m not talking about just some window-dressing small stock orders that will make the news feeds on the tape — I’m talking bigger money, real money being put down to buy stock in the companies that they know first-hand and know well.
***Market strife = management opportunities
The unprecedented selling in the US stock market over the past weeks has been incredibly gut-wrenching. The S&P 500 Index dropped from February 19 to March 23 by 33.92% which is one of the worst plunges in the market in history.
S&P 500 Index Year to Date Source Bloomberg
But from March 23 to date the S&P 500 Index is up 15.18% — showing that there are folks that know that there are plenty of companies that are going to get through the lockdown and shutdown of the U.S. economy. In my recent April issue of Profitable Investing I addressed all of the companies in the model portfolios one-by-one from a perspective of status. By status, I looked at the underlying net asset or liquidation values of each company.
And in turn I looked at each of the stock prices of the companies and how they had been discounted not on sales or earnings which are currently impossible to value for a while — but book value. This intrinsic metric of valuing companies is really the only way to put a value and a price on a stock right now.
But more important in terms of status is the credit of each of the companies. Because even if a company has intrinsic value including for debt — if those assets can’t support the service and required rollover of debt — then those assets could be liquidated, and the stock will be worth less or become worthless.
So, it is critical that companies have cash and cash equivalents to cover debt service and liabilities out at least one year. And it is important that they have ample and untouched credit lines that can be drawn upon if needed to keep things going and to make needed payments. And it is important that existing creditors appear to be willing and able to stick with companies in their credit and lending — including bond holders and bond buyers.
After doing all of this, I presented my summary of my analysis of the credit status of each of the holdings.
But credit is just another part of status. Because I also need to see that companies are able to not just get through the current mess — but to be able to emerge and thrive as the lockdown is released and some normalcy comes back. This means having their employees, keeping their suppliers and supply chains and just as importantly keeping their customers. Thus, the business models need to be robust to maintain status now, and to be able to work and thrive as we emerge from the lockdown.
So, again, I examined each of the holdings and their underlying businesses to make sure that they can not only sustain themselves — but also to succeed.
And what I also have been seeing is that all of the companies in the model portfolios have insider ownership of the stocks of the companies — and a big number of them have insiders including the CEOs, CFOs and the rest of senior management and the board members buying stock in measurable amounts over the past weeks.
They know the underlying status of each of their companies. They know the credit conditions and the ability to service debts. They know their bankers and bond holders. And they know their business models and what will happen now with their employees, suppliers and customers and what should happen during a new normalcy. And their view the current stock market valuation of the underlying intrinsic book values as bargains. And they are buying.
S&P 500 Book Value (Pink) & Price to Book Ratio (Orange) Source Bloomberg
And that valuation is evident in the general S&P 500 Index as the Price to Book (P/B) ratio of the index has plunged from 3.72 times to a low or 2.45 times from February 19 to March 23 and now is climbing back to a current level of 2.83 times which is way below just the three-year average alone.
Moreover, the actual book value of the companies inside the index has been building over the past three years alone and beyond — meaning that the companies behind the stocks of the S&P 500 Index on a weighted basis of the index are worth a whole lot more than they’ve been.
This is a big value proposition. And one that insiders know first-hand and they have been buying the stocks of their companies. So, just like the robber barons of the 19th century — the CEOs, CFOs, their management teams and board members are buying as others have been selling.
This is not a perfect metric of an indicator that all will go well — but it is a strong one and one worth noting as you choose to continue to own your stocks and more so as you’re looking to buy into the deeply discounted stocks of the current market.
***Inside track
Every public company has to report insider buys and sells. The U.S. Securities and Exchange Commission (SEC) has its required Form 4 which has to be filed to report the transactions including time and date as well as amounts and prices. In addition, there are also proxy forms for significant investors and related insider transactions that are also required by the SEC to inform the public about trades to buy and sell stocks of public companies.
These get posted in news feeds that any investor can see for any specific company and their stock.
Over the trailing four weeks to today, in the U.S. market there have been 1,379 stocks with insider buying reported under Form 4 and proxies. That is a big number and it becomes more impressive when looking at the number of shares that is running into the millions of shares to tens of millions of shares per many of the companies reporting. And in turn, this is amounting billions of dollars of insider stock purchases with their own money putting skin in their own game after the stock market has sent shares down hard.
As I noted earlier, many of these buy trades are coming in the same companies that I have in the model portfolios. Here are some of the collection to highlight the insider buying of quality companies on sale.
I’ll start with Kinder Morgan (KMI) the massive pipeline company. Richard Kinder has made four block trade buys of 300, 305, 300 and 500 thousand shares.
Compass Diversified Holdings (CODI) is a favorite investment holding company that is like a private equity firm that buys develops and sometimes sells heavy cash-generating strongly branded industrial and consumer goods companies. It has seen 8 insider block buys amounting to over 320 thousand shares.
KAR Auction Services (KAR) is the economic neutral company that provides auction services for used cars, off-lease cars and other vehicles and also works with insurance companies with disposing of salvage vehicles. It has reported 14 insider block trades amounting to 120 thousand shares.
WP Carey (WPC) is a triple-net lease structured REIT that I have followed since it came to the public market back in the later 1990s. It is one of the very few true dividend aristocrats having upped their quarterly distributions every quarter year after year after year. It has reported 10 insider buys with block buy trades amounting to over 38 thousand shares.
B. Riley Financial (RILY) is a newer favorite company of mine. It has a concentrated collection of business units including Great American which is the leader in shutting down and liquidating retail companies and stores. It will only have a surge in business coming its way. It has reported 9 insiders buying resulting in block buy trades of 47,000 shares. And to further note, the CEO, Bryant Riley is the single largest shareholder with 18.37% of outstanding shares of the company.
I’m continuing my research and will provide new names in the coming
***Bottom line
Insider buys are not a guarantee that a company will be a huge success or that a stock will trounce the general stock market in return. But in this time of great uncertainty — buying by those on the inside of companies — especially by the CEO, CFO, management and board members is a very good indicator that they know the company and that they are confident enough to put their own money on the line for real skin in the game.
***How to follow Neil’s work
Jeff here again. If you’re not a subscriber to Neil’s Profitable Investing newsletter, this is a fantastic time to join. That’s because, as Neil noted above, in his most recent issue, he walks through — literally — every holding in his Total Return Portfolio. You’ll get an analysis of each company including updated, specific “buy up to” prices in light of today’s market. Click here to learn more.
We’ll continue to bring you more of Neil’s research on insider buying as it’s available.
Have a good evening,
Jeff Remsburg
