Corporate insiders in the consumer non-cyclical sector of the TSX are rapidly selling shares - a particularly bearish development given that many of those stocks have underperformed the broader market this year.
Usually during a period of under-performance, insiders are out bargain hunting. But that’s not the case right now among consumer non-cyclicals, which include food, beverage and tobacco retailers and producers, as well as manufacturers of household goods and other companies less sensitive to economic conditions.
“When they don’t go shopping, it means they either expect prices to head lower or believe the risks are too high to buy,” noted Ted Dixon, CEO of INK Research, which monitors the buying and selling activity of officers and directors within their own companies. “We suspect both dynamics are at work in the consumer area in Canada.”
INK Research’s short-term consumer non-cyclicals indicator that monitors trading activity over the past 30 days is currently at 33 per cent, Mr. Dixon told Inside the Market. That means in the past month there have been about three companies with key insider selling for every one with buying.
Based on the latest insider activity, INK Research has downgraded the sector to “fair valued,” from “undervalued,” and is weighing a further possible downgrade to “overvalued.”
“Insider sentiment is deteriorating so quickly that the outlook continues to be negative,” Mr. Dixon said.
Given that insiders are highly knowledgeable about their businesses, investors should take note and approach the sector cautiously.
One explanation for the sudden downdraft in sentiment for the sector: Mark Carney’s departure as Bank of Canada governor. Consumer-focused companies benefited significantly from his ultra-lose monetary policy. But the future direction of Canadian interest rates is now more uncertain without Mr. Carney at the helm (his successor still hasn’t been named.)
“Insiders in the consumer area appear a bit nervous,” said Mr. Dixon. “After all, if the engineer of Canada’s great household credit boom is moving onto other pastures, perhaps investors will also look for other opportunities.”