Confident insiders buying
Although much has been written about the “crisis of confidence” on Wall Street, corporate insiders apparently remain optimistic. According to Vickers Weekly Insider Report, insiders — mostly corporate executives and board members — were recently selling around 1.3 shares of their companies’ stock for each share they bought.
While insiders are still net sellers of company stock, the ratio is quite bullish. To put the current level of selling and buying in perspective, Vickers considers a sell/buy ratio between 2-to-1 and 2.5-to-1 as “neutral.” In fact, the current ratio of sells to buys is close to the level of insider bullishness seen in 2002, near the end of the bear market.
When analyzing insider trading, the Forecasts places more importance on buying than selling. Insiders may sell for reasons unrelated to a company’s prospects, such as diversifying a portfolio or funding a major purchase. But insiders generally buy company stock for one reason — to make money.
To be sure, insiders have been bullish for most of 2008, according to Vickers. And, like many investors this year, they have been wrong.
Historically, it is not unusual for insiders to be wrong in the short term — they tend to buy early. However, history also shows patient investors often make money by following the insiders’ lead.
Two Forecasts stocks with insider buying in recent weeks are Hewlett-Packard (40; NYSE: HPQ) and National Oilwell Varco (33; NYSE: NOV).
A Hewlett-Packard director purchased 20,000 shares at the end of August for about $47.23 per share. While the insider has lost money, the Forecasts believes H-P will outperform the market over the next 12 months. The company has topped consensus profit estimates in each of the last eight quarters and seems capable of exceeding the 18% earnings growth expected in the October quarter. At just 10 times fiscal 2009 earnings estimate of $4.14, H-P looks cheap for an industry leader putting up double-digit growth.
Tech stocks have come under pressure in recent days, hurt by concerns about a global economic slowdown. But H-P has done a nice job of diversifying its product line — the recent acquisition of Electronic Data Systems greatly expands its services business — which should help support profits if the economy suffers. Hewlett-Packard, rated Buy and Long-Term Buy, is down 25% from its 52-week high of $53.48 and seems capable of reaching the high $40s over the next year.
National Oilwell Varco has been beaten up badly over the last three months, falling 63% from its 52-week high of nearly $93. However, the Forecasts sees the selling as overdone, especially given the earnings-growth potential of this oilfield-services leader. And we are not alone in viewing the stock as a buy. A corporate officer purchased 10,000 shares in September at about $47.47 per share.
The broad sell-off of National Oilwell and other oilfield-services stocks implies that oil prices will plummet more than the Forecasts expects, falling enough to drive cuts in spending on energy exploration. Still, even if you use the low-end analyst profit estimate for 2009 ($5.30 per share, versus the $6.00 consensus), the stock trades at less than six times earnings. A Buy and Long-Term Buy, National Oilwell Varco has the potential to rebound sharply if it exceeds fairly low investor expectations.