Wednesday, August 17, 2011

Stock Purchases By Executives & Directors Hit Highest Level Since 1998

Here's a CNBC article on what a widely-watched insider buying newsletter (Vickers Weekly Insider) had to say. As investors seemed to be fleeing a volatile market, there was apparently a 16-fold increase in buy transactions in the last three weeks.

The fact that senior executives and directors are buying is far from a reliable signal that a stock is cheap or that stocks in general are cheap but the sheer breadth and quantity of buying lately is, at least, noteworthy.

Fearless Front Office: Most Insider Buying Since 1998

So insiders seem to have turned very bullish. The article highlighted the insider buying of JP Morgan (JPM) and Kraft (KFT), along with several others.

Kraft has a very good business but I don't think it's necessarily a bargain at or near the current valuation.

JP Morgan is certainly not expensive at a little over 7x earnings but few banks are these days.

I'd never buy a stock because an insider happens to be buying. Yet, if I liked shares of a particular business I'd consider it a slight positive to see an executive or director buying some shares.
(An extremely large purchase, especially if it were substantial relative to the wealth of the individual buying, would be more impressive.)

So some incremental purchases is certainly not bad thing. The absence of selling in a stock is also important though that becomes hard to gauge with the use of stock options (and the inevitable options expiration) being so prevalent.

I happen to think the best case scenario is when a CEO, along with other key executives, have a substantial portion of their wealth tied up in the company and a demonstrated a willingness to keep it there over the long run.

That's essentially what has been the situation at Berkshire Hathaway (BRKa) for years. When just about all of your wealth is in the company (as is the case for Charlie Munger and Warren Buffett) it's hardly a negative if more shares aren't being purchased.

In enough cases, an insider buy turns out to be a short-to-intermediate-term trade by an executive or director or not enough capital at risk compared to total net worth to really matter.

There's nothing wrong with that but it's no reason to celebrate either.

Ultimately, you have to make a call on the judgment of individual buyer. Not an easy thing to do.

That many senior corporate executives and directors are talented and capable professionals hardly assures they're going to reliably make wise stock purchase decisions.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
 
Site Meter