North American chief executives and their senior managers are buying their companies’ shares on a scale not seen since March, 2009.
The heads of Morgan Stanley, Chiquita Brands International Inc., General Motors Co. and the holding company of Continental and United Airlines are among those who in the past week have sought to demonstrate confidence in their companies through share purchases.
Other influential insider buyers have included James Flaws, Corning Inc.’s veteran chief financial officer, and Lou Simpson, a confidant of Warren Buffett and now a director of Chesapeake Energy, a big natural gas producer.
Heavy insider purchases often portend a vigorous market rally. Given their knowledge of their own companies, executives can spot valuation anomalies in the market.
Ben Silverman, research director at New Jersey-based InsiderScore, which tracks insider trades, said that “in the past 30 years, there has been no time when the market bottomed and rallied when it wasn’t preceded by a critical mass of insider buying”.
At the start of trading on Thursday, companies in the S&P 500 were priced at 11.3 times forecast profits, near the cheapest since March, 2009, according to Bloomberg data.
Mr. Silverman said that “most of these guys are in it for the long haul”, saying that securities laws generally required insiders to hold their shares for at least six months.
Roger Martin, dean of the University of Toronto’s Rotman School of Management, added that as an investor “it’s about the only thing I would pay attention to. [Insiders]just have way better information.”
However, he said that they, like other investors, could be blindsided by two hard-to-predict factors: political and macro-economic developments.
Mr. Silverman said that insiders had been more bullish twice in the past eight years than they are now – in March, 2009, when a strong rally ensued, but also in November, 2008, which turned out to be a false bottom.
Even so, Mr. Silverman contrasts the $2.1-million (U.S.) invested by Morgan Stanley’s James Gorman with the more modest $173,000 spent by Continental United’s Jeff Smisek. “The question is, is there a lot of conviction behind the buying or is it just public relations?” he asks.
Few insiders have demonstrated more conviction than the CEO and several directors and managers of Montreal-based Yellow Media, Canada’s biggest provider of online services by revenues.
They have plunged into the market during the past week, just days after the company reported a loss, slashed its dividend by three-quarters and had its credit rating downgraded to junk status.
Marc Tellier, Yellow Media’s CEO, who bought $142,000 (Canadian) worth of stock on Monday, said: “The market has its concerns but the market is not always right”.