Insider Buying has fallen off the cliff

I am dismayed by the lack of animal spirits. We are now four weeks into the earnings season and I see little insider buying. In fact, there is a substantial drop after the brief pick up we experienced during the December 2018 rout.

In spite of that, the market had its best January in years.  The semiconductor ETF had its best day since 2009.  Apple’s stock rose nearly 7% on a feeble earnings report.  Top-ranked Bernstein analyst, Toni Sacconaghi dished the stock on CNBC. Our fund, The Insiders Fund, had its best month since 2009, up 17% net of fees.

So is this sustainable?  What started out in December as a sharp uptick in insider buying has now collapsed.  There was a tsunami of insider buying in 2009.  Today there is little enthusiasm so I’m skeptical that the momentum can be maintained.  I wrote in a prior blog post about conditions that would lead to a sustainable rally and one of them was the Federal Reserve taking their foot off the brakes.  That happened, the Fed blinked and signaled the rate hike cycle was over. The market shot upwards easing the angst of December.

For a sustainable stock market rally to continue, we will have to see a major resumption of the insider buying trend that started in December. In fact, its done the opposite. Insiders, now four weeks into the 4th quarter earnings, see little reason to buy their stock.

There were few buys last week of any interest.  10% shareholders adjust their holdings but the only purchases of interest by directors and officers of any companies are outlined below.

Buys

KMI Kinder Morgan  Founder and Chairman of the Board, Richard Kinder, purchased $3.9 million at an average price of $17.99. These purchases were made near a 52 week high which makes them unusual as insiders tend to buy closer to a 52 week low than its high.

DFS Discover Financial CEO Hochschild bought $2 million at $66.67 according to the Washington Service Group. On 1/25/19 BMO Capital analyst James Fotheringham lowered his price target on Discover (DFS) to $85 and kept his Market Perform rating after its Q4 earnings miss driven by higher than expected costs.

$85 is nearly 35% higher than where the stock is trading but it’s only a market perform rating?  It always amazes me how analyst rate stocks, shrouded in double speak and safety. If the stock goes up 35% he’s right, if it goes down he’s right.

The analyst goes on to state that the company’s peers such as Capital One (COF) and Synchrony (SYF) offer “much greater potential valuation”, with Discover on the “wrong side of growth math” relative to those names. Fotheringham also warns about potential negative credit surprises as Discover is accelerating its loan growth despite a decelerating overall market. 

BACML (Merril Lynch)reiterated their Buy rating with a PO to $80, based on a 9x multiple to their ’19 EPS forecast. Morningstar has a buy on it as well.

Sales

Insiders always find ways to sell with their so-called “planned sales” which in reality is just a legal loophole around the SEC restrictions on insider selling during earnings blackout periods.  Some of the more notable ones are described below.

SRPT Sarepta Therapeutics took off last week after Piper Jaffray analyst Danielle Brill raised her price target for Sarepta Therapeutics to $200 from $168 and keeps an Overweight rating on the name after taking over coverage from Edward Tenthoff. The analyst thinks the company’s adeno-associated virus gene therapy “could be a total game changer” Brill tells investors in a research note. She sees a “substantial amount of unrealized share value” and says Sarepta is “easily one of our favorite names this year.”

Insiders said thank you, by exercising and selling over $14 million worth of options with more than 4 years left on them.  We also plan on selling the remainder of our holdings as the stock ran $25 in two days.  This is a name we would buy on a pullback. Based on the past trading history, that seems likely.

BLK Blackrock  Three insiders sold $18.5 million worth of the giant money manager although the sales did not represent a significant percentage of holdings, the largest being 13%.

Insiders unloaded JP Morgan, Salesforce, Proctor Gamble, and BJ’S Wholesale Club in large numbers but in the scheme of things they represented small percentages of their holdings so it is hard to read to much into it other than the fact they WERE NOT BUYING.

In this report, we examined open market purchases from employees and directors.  Insiders sell stock for many reasons, but they generally buy for just one – to make money.  As a standard, we only look at material amounts of money, $200 thousand or more, as anything less could just be window dressing. The bar is different from selling because the natural state of management is to be sellers. This is because most companies provide significant amounts of management compensation packages as stock. Therefore, with selling, we analyze for unusual patterns, such as insiders selling 25 percent or more of their holdings or multiple insiders selling near 52-week lows. Another red flag is large planned sale programs that start without warning. We generally ignore 10 percent shareholders as they tend to be OPM (other people’s money) and not the SMART money we are trying to go to school on.  Although this info is available for free from the SEC’s Web site, Edgar, we subscribe to the Washington Service as they provide a way to manage and make sense of the vast realms of data.

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