Follow The Money


Are investors, as a group, bullish or bearish?

That seemingly simple question defies a simple answer. Yes, research firms provide regular data that reveal whether investors say they are bullish or bearish. However, talk is cheap; history has shown that investors’ actions don’t always match their words. Therefore, we must evaluate what investors are actually doing with their money, rather than what they say they are doing.

One way is to examine mutual-fund flows. Are investors putting an increasing amount of assets into stock mutual funds, or are bond funds receiving the lion’s share of new money?

Interestingly, it has been no contest over the last 26 months. Net inflows to taxable and tax-exempt bond funds exceeded $27 billion in 2008 and $375 billion in 2009. That compares to net outflows from U.S. equity funds of $151 billion in 2008 and $39 billion in 2009. And investors have continued to pull money out of U.S. stock funds this year (through Feb. 24) to the tune of $500 million, versus net inflows of nearly $54 billion to bond funds.

The upshot is that if investors in the aggregate are bullish on stocks, it would be hard to prove based on how they have invested in funds.

Ironically, the big bond inflows and net outflows from domestic equity funds are a reason some market watchers see further upside for the stock market. Lots of money in bonds relative to stocks means that if investors become more bullish about equities, they can muster substantial buying power.

Another way to get a handle on sentiment is to track buying and selling by so-called smart-money investors. Corporate insiders, such as top executives and board members, are worth following because of their track record. Historically, these insiders have tended to invest at the right time.

Currently, corporate insiders are hardly bullish. According to Investors Intelligence, the latest filing period by insiders showed “a sharp increase in (insider) overall activity, and the increase was almost all accounted for by new selling.” Corporate insiders have been selling into the market rally, according to Investors Intelligence, which gives some market watchers pause.

To be sure, not all insiders are selling. CVS Caremark ($35; CVS), the drugstore and pharmacy-benefits giant, saw a recent insider purchase of more than $5 million. Per G.H. Lofberg, named president of CVS’ pharmacy-benefit-management division in December, reported on Feb. 17 a purchase of 147,000 CVS shares at an average price of $34.10. CVS stock has been mounting a comeback following the sharp decline in early November on disappointing news from its pharmacy-benefit-management division.

Judging from his recent purchase, the division’s new president seems confident in the unit’s turnaround. CVS posted a nearly 14% increase in fourth-quarter per-share profits to $0.79, $0.01 better than the consensus estimate. CVS, trading at a modest 12 times the 2010 consensus earnings estimate of $2.80 per share, is a Focus Buy and Long-Term Buy.

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