What is insider selling saying?
Another thing for investors to worry about
William Hanley
Financial Post
Thursday, December 12, 2002
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We have seen the near future of the stock market. And we believe it looks a lot like yesterday's tight action, when the bulls and bears basically grappled to a draw in the absence of any major market-moving news.
The S&P/TSX composite index eased 9.95 points to 6587.25 and the S&P 500, the Wall Street benchmark, added just 0.51 to 904.96.
With the market struggling to regain the traction it lost when the fall rally petered out a couple of weeks ago, investors are wondering if the usual Christmas --sorry, make that holiday -- rally is going to show up this year. Tuesday's solid gain after Monday's heavy fall was encouraging for the bulls, and yesterday's morning turnaround from a weak opening seemed to confirm that the market is intent on rising in the absence of anything new to disabuse investors of that notion.
But the proverbial wall of worry the market must climb always has some tricky spots to be negotiated. (A market with no worries, for example, would be worrisome in a contrarian way -- a worry in itself.)
In the past couple of days, the wave of insider selling in November has given investors another factor to ponder in the great market puzzle. Thomson Financial reports that just as that fall rally was attracting more investors, many company insiders were lightening up.
Insider selling of U.S. stocks jumped 125% last month to US$2.6-billion from US$1.2-billion in October, with insiders at the technology companies leading the rally and unloading at an even more rapid rate. Meantime, insider buying rose only 5% to US$193-million.
That ratio of US$13.71 in insider selling to US$1 of insider buying looks pretty damning for the market in that insiders know better than us about their companies' and stocks' prospects. But Thomson Financial notes that a ratio between US$10 and US$20 is usually a neutral indicator for the market, not a bearish signal.
On the other hand, it's certainly no bullish signal either and Thomson Financial notes it's the first time since June that the ratio has exceeded US$10 and trading so far this month indicates it won't be falling back below that level.
More specifically, Mark LoPresti of Thomson First Call has alerted clients to selling over the past 90 days by significant-role insiders at 16 companies with "lofty valuations on a relative price-to-book basis."
LoPresti says value investing has outperformed other disciplines over the long haul and over many shorter periods, too. But he says there's more to value investing than finding and buying stocks that trade at low price-earnings and book value levels.
He quotes a University of Michigan study that examined the relationship of insider trading and value, primarily as determined by price-to-book multiples. The study confirms what value investors have long suspected: "A relatively high multiple to book value is especially predictive of future underperformance when accompanied by insider buying."
Among the 16 companies identified as expensive stocks that have been subject to significant insider selling are high-profile stocks Anheuser-Busch Cos. Inc., Dell Computer Corp. and Krispy Kreme Doughnuts Inc.
Brewer Anheuser-Busch, for instance, sells at a price-to-book ratio of 11.1:1, whereas the industry average is 5.3:1. Dell, which saw eight insiders sell almost five million shares in November, has a price/book of 12.2 versus just 3.7 for its sector. Krispy Kreme, which has kult status among the doughnut kognoscenti, sells at a 9.1:1 book value against an industry average of 3.0:1. It also sports a fat price-to-earnings ratio of 60:1.
It will be interesting to keep track of these three stocks over the coming weeks and months.
Investors in U.S. stocks are able to monitor inside selling and buying much easier than those who follow Canadian stocks. The Ontario Securities Commission gives insiders 30 days to file their dealings, but those dealings often are not published in the OSC Insider Trading Bulletin for months. An electronic filing system is still not up and running and there's no indication of when there will be the equivalent of the almost instantaneous U.S. system.
whanley@nationalpost.com
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