Cautious Insiders

9/9/2013


Actions speak louder than words, an adage that certainly applies to assessing investor sentiment. Indeed, while investors may call themselves bullish or bearish, what they actually do with their money speaks volumes.

Investors can easily track the buy and sell decisions of one group of investors, corporate insiders — company executives, directors, and major shareholders. Insiders must report trades to the Securities and Exchange Commission.

Judging from recent insider trading activity, these "in-the-know" investors are hardly bullish. According to Thomson Reuters, the dollar value of shares sold by insiders in early August exceeded purchases by a ratio of more than 45-to-1. That's the second-highest ratio recorded this year. Thompson Reuters classifies a sell-to-buy ratio above 20-to-1 as bearish.

Investors should take note of insiders' heavy selling. But keep in mind that insiders tend to own large chunks of their companies' stock and may sell for many reasons unrelated to the attractiveness of the stock or the market — portfolio diversification, tuition payments, home purchases, etc.

Insider buying, on the other hand, generally sends a single message – the insiders see value at current prices. Subscribers considering a stock purchase should treat insider buying as a useful confirming signal.

Despite fairly muted insider buying marketwide in recent weeks, one sector has seen a spate of corporate insiders snapping up stock: banking. The sector certainly doesn't lack for controversy or drama. Wall Street continues to weigh many crosscurrents — rising interest rates, increased regulation, and continued legal entanglements for a number of players. 

J.P. Morgan Chase ($51; JPM) is the poster child for all that affects the banking sector. It seems rarely a day goes by that the U.S. government doesn't go after the financial giant for some alleged infraction, the latest being a bribery investigation related to dealings in Asia (see Portfolio Review for details). Analysts also wonder about banking regulations that might force divestitures or boost capital requirements.

During a clearly tumultuous time for J.P. Morgan, director James Crown has purchased more than 738,000 shares since April at an average price around $47.10 per share. J.P. Morgan stock has pulled back 10% from its 52-week high of nearly $57 per share. The price dip, coupled with a 27% boost to the dividend in July, has lifted the yield to 3%.

J.P. Morgan remains a top scorer in our Quadrix stock-rating system, with an Overall score of 98 (out of a possible 100), a Momentum score of 92, and a Value score of 96. While market jitters and headline risk will cause periodic volatility, the stock remains one of the more attractive plays for growth and income. J.P. Morgan is a Focus Buy and Long-Term Buy.


Another Forecasts favorite in the banking sector seeing bullish insiders is Fifth Third Bancorp ($18; FITB).  Company director John Schiff purchased 40,000 shares in late May at prices around $18.35 per share. The stock, reviewed in Analysts' Choice, offers a solid yield of 2.6% and market-beating upside potential. Fifth Third Bancorp is a Buy and Long-Term Buy.


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