10 stocks the insiders are still buying
The people who know their companies best are mostly selling into the rally, but those who follow insider trades say some are still snapping up shares.
By Michael Brush
While the typical stock portfolio has put in respectable gains this year -- with advances of 7% for funds aping the S&P 500 -- corporate insiders are positively whomping the markets.Check out your options.
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Portfolios based on insider buying and selling patterns are up as much as 51%, as of last week.
So we decided to consult our favorite insider specialists to find out why insiders are trouncing the money managers, what they think may happen next, and what their favorite picks and pans are. But before we get to that, have a gawk at these awesome returns for insider portfolios.
An aggressive portfolio based on insider trades run by David Coleman of Argus Research Group, which publishes Vickers Weekly Insider Report, is up 51% year to date. A more conservative version of the portfolio put together by Argus has advanced 17%.
Long positions selected each week by Seattle-based Market Profile Theorems and held for eight to ten week periods were up 17.5% to 24% as of the end of April, for total returns of around 40%.
Longs recommended by Muzea Insider Consulting in a model portfolio advanced 19%. Some 93% of the 43 stocks selected by Muzea moved higher.
10 insider longs
Company Price 6/3 52-wk. High
Intervoice (INTV, news, msgs) 3.26 3.80
Cerner (CERN, news, msgs) 20.84 54.90
Biopure (BPUR, news, msgs) 5.33 8.30
Providian Financial (PVN, news, msgs) 9.39 9.85
Max Re Capital (MXRE, news, msgs) 15.43 15.65
Prudential Life (PLFE, news, msgs) 11.60 22.44
Planar Systems (PLNR, news, msgs) 18.57 22.99
CMS Energy (CMS, news, msgs) 7.87 17.78
Interface (IFSIA, news, msgs) 3.85 9.28
Avnet (AVT, news, msgs) 13.40 22.20
The only place it hasn’t paid to follow insiders so far this year has been in selecting stocks to go down. Short positions chosen by Market Profile Theorems and Muzea Insider Consulting advanced anywhere from 4% to 15%. Argus does not normally select stocks to short.
The experts cite two reasons that insider portfolios are producing rollicking returns in this market.
First, investors have turned their focus away from geopolitical events like war and gone back to looking at fundamentals, says George Muzea, of Muzea Insider Consulting Services. That happens to be where insiders shine, because they know their companies better than Annika Sorenstam knows the greens at the Colonial Country Club. “Insiders are the ultimate fundamentalists,” says Muzea.
Second, new rules now speed up the reporting of insider transactions. That means the public gets in on the action before stocks move on actual company news. “It’s akin to having today’s paper today, as opposed to a month from now,” says Coleman.
Information on insider transactions is publicly available in a variety of ways, including through this site's Insider Trading feature. The Securities and Exchange Commission's EDGAR site provides the latest raw numbers and filings. And Argus Research Group's Vickers site (see link at left under Related Sites) offers a two-year history of insider transactions for free.
But there's a down side
So what are the insiders saying now about a market that has advanced so much in the past three months? They’ve turned so bearish that the outlook for stocks is questionable at best -- and downright bleak at worst.
“Insiders are selling at levels similar to what we’ve seen right before other good-size corrections,” says Muzea. “The market probably isn’t going to roll over right now. But I think anyone who sells stocks in here will be able to buy them back a lot cheaper in July.” He says insider sentiment suggests there will be significant earnings disappointments in the next couple of earnings seasons, but professional investors are buying anyway for fear of missing out.
“I’ve seen this before -- institutions chasing stocks because they are concerned about underperforming and losing their jobs at a time when insiders are selling into price strength. It is a never-ending cycle, the transfer of wealth from dumb money to smart money,” says Muzea, author of "The Vital Few vs. The Trivial Many: A Unique Concept for Always Making Money in the Stock Market," published in February.
One thing in particular that stands out: Insiders aren’t stepping up to buy shares in economically sensitive sectors such as basic industries or retail, which you would expect if the economy were about to grow nicely.
Based on bearish insider sentiment -- plus a slowdown in earnings trends and excessive bullishness in the market -- Michael Painchaud of Market Profile Theorems thinks the Dow Jones Industrial Average ($INDU) is overpriced by about 400 to 500 points right now.
Three long-short mini-portfolios
Given the impressive success of top managers in trading shares in their companies, we asked our three insider experts to put together short lists of picks and pans based on what corporate insiders are up to. Here’s what they came up with.
Vickers Weekly Insider Report. In technology, Coleman suggests Intervoice (INTV, news, msgs). The company offers call automation and “unified message” services, which make it easier to access phone calls, e-mails and faxes in the workplace.
Intervoice insiders were smart sellers when they dumped shares in the $30 range in early 2000 -- and again around $14 last year. The stock promptly drifted down into the low single digits last year. That’s when they began buying back stock. Chairman David Brandenburg and board member Gerald Montry were in the market again a few weeks ago, buying about $380,000 worth of stock at prices ranging from $2.24 to $2.98. Despite the recent price rise to $3.75, Coleman thinks Intervoice remains a timely purchase. “Insiders are long-term, opportunistic investors,” he points out.
In health care, Coleman likes Cerner (CERN, news, msgs), which offers software for managing access to medical records. Insiders were selling earlier this year around $33, right before the stock gapped down and became a teenager. Then insiders started buying back shares around $18. The stock tanked because the company said it would miss earnings estimates. But it also has projected stronger cash flow, a reduced cash burn and stronger business trends. Moreover, in late April, Cerner announced a buyback of roughly 5% of its shares.
In the coming weeks, the Food and Drug Administration is expected to approve a kind of artificial blood designed to carry oxygen, called Hemopure, which was developed by Biopure (BPUR, news, msgs). The product has successfully passed two Phase III trials. That might explain why insiders have been heavy buyers all year in the $2.50-to-$3.50 range. Board member David Judelson and President Thomas Moore put more than $1 million of their own money into the fund in March at around $2.50, picking up shares in a secondary offering by the company to raise more funds. The shares recently changed hands for around $5.20.
Coleman also likes the insider buying at consumer-credit company Providian Financial (PVN, news, msgs) in the past several months -- right up to $8.50 per share. Again, insiders here seem like astute market timers, because they sold shares heavily for $40 to $50 in 2001, ahead of sharp declines. Director David Grissom sold over $2.8 million worth of stock for around $50 in July 2001. In early May, he bought back around $1.8 million worth of stock at about $8.10. Director Richard Field was also a heavy buyer in May, picking up around $1 million worth of stock in the $8.10 to $8.70 range. One Wall Street shop recently downgraded Providian because of concerns about high valuation.
On the short side, Coleman thinks heavy insider selling raises concerns at Marvel Enterprises (MVL, news, msgs) and Libbey (LBY, news, msgs). Marvel, the home to comic-book superheroes like Spider-Man, X-Men and The Incredible Hulk, has seen significant insider selling in the past three months around the $20 range as the stock approached all-time highs. Chief Operating Officer William Jemas cashed out around $4.4 million worth of stock for around $19 per share in May. Directors Sidney Ganis, Morton Handel, Lawrence Mittman and James Halpin together sold around $8 million worth of shares in the $19 to $20 range in May. At Libbey, which sells kitchen utensils and tableware, insiders have continued to sell even as the stock declined in the past 12 months -- not an encouraging sign. Analysts recently cut estimates on declining margins and sales, once you take out the gains from acquisitions.
Muzea Insider Consulting. For long positions, Muzea is bullish on two insurance companies, Max Re Capital (MXRE, news, msgs) and Presidential Life (PLFE, news, msgs). At Max Re, which does business in Europe, Muzea likes the fact that insiders keep buying as the stock advances. “The buying that first got us interested was the purchase by the chief financial officer in February 2003. That was his first purchase in a long time. We renewed our buy recently because the chairman and a couple of vice presidents all bought at around $14.” Analysts bumped up estimates sharply after the company beat expectations in the last quarter because of growth in premiums and investment returns.
At Presidential Life, Muzea likes the volley of concentrated buying from last November to this May, in the $6-$9 range. “When you see a cluster of buying over 6 months like that, you can rest assured insiders feel very strongly about the stock in that range.” The stock recently traded for around $11.25.
Muzea is also bullish on Planar Systems (PLNR, news, msgs), which makes flat-panel displays used in everything from digital radiology and gas pumps to personal computers. The company is increasing margins by moving some manufacturing to Asia. Insiders have a pattern of buying in the high teens -- like they did in April -- and selling in the upper $20 range. The stock recently traded for around $20.
On the short side, Muzea is suspicious of insider selling into stock-price declines at Albemarle (ALB, news, msgs), a company that produces chemicals, including flame-retardant compounds added to plastics.
In contrast, insiders at j2 Global Communications (JCOM, news, msgs), which provides voice-mail and conference-calling services, have kept selling as the stock advanced to $35 from $20 at the start of the year. That’s not necessarily a negative sign. But significant selling by Chief Financial Officer Nehemia Zucker in April and May, which appears to have cleaned out his holdings, caught Muzea’s eye.
“Unless he is getting some options, he is pretty much out of the stock,” says Muzea. “If he thought the stock was going higher, why would he sell more in May? He figures either bad news is coming, or he can’t believe the price he is getting. In that case, the stock might go down, too, if you get downgrades on valuation from analysts.” Indeed, First Albany analyst Youssef Squali recently wrote that at $36, the stock pretty much discounts much of the potential upside in earnings.
Market Profile Theorems. For long positions, Painchaud likes the recent “cluster buying” in the $6.60 range at CMS Energy (CMS, news, msgs), a utility. He also points out that insiders with good track records have been snapping up shares at Interface (IFSIA, news, msgs), which makes medical devices. At Interface, Director James Miller purchased stock in May at around $3. At Boston Scientific, Director Ernest Mario bought in May at around $50.
Electronic-components maker Avnet (AVT, news, msgs) late last year saw a big buyer who has timed the stock well in the past: Chairman and Chief Executive Roy Vallee. He picked up shares at around $8.40 last November, after selling a large position a year before at around $22. Rikard Ekstrand, of First Pacific Advisors, which has a position in the stock, thinks in the next three years of improving margins at the company could boost earnings to $3 per share. He thinks that could take the stock north of $30, from recent levels of around $13.60.
On the short side, Painchaud is suspicious of insider selling at homebuilders and real estate investment trusts (REITs). He points to Beazer Homes USA (BZH, news, msgs), Hovnanian Enterprises (HOV, news, msgs), KB Home (KBH, news, msgs), and the REITs Simon Property Group (SPG, news, msgs) and Washington Real Estate Investment Trust (WRE, news, msgs). At Beazer, President Ian McCarthy and Vice President John Skelton cashed out a striking $12.4 million worth of stock in late May. Homebuilders just got upgraded at Citigroup Smith Barney because declining interest rates should support demand, while supplies are short.
Painchaud also says sellers with good records for timing their own stocks recently lightened up at Raymond James Financial (RJF, news, msgs), Flextronics (FLEX, news, msgs), consumer-products company Alberto-Culver (ACV, news, msgs), chip maker Rambus (RMBS, news, msgs) and Six Flags (PKS, news, msgs).
To him, it’s all a sign the stock market may be headed down near term, before ending the year higher than it is now. Says Painchaud: “We would get defensive and go away for three months.”
moneycentral.msn.com
At the time of publication, Michael Brush owned or controlled shares none of the equities mentioned in this column. |
