Some investors are really bullish - that's why the major global stock indexes are up a lot this year. Some investors are really cautious - that's why there are historically high amounts of cash sitting in safe parking spots.
For a different perspective on how good stocks look right now, let's consider what corporate insiders are doing. Executives, directors and major shareholders must report trading of securities in their company to regulators. Buying by insiders is a bullish signal. Selling isn't considered to be as definitive, but it's still worth keeping an eye on.
Insider trading can be tracked through the System for Electronic Disclosure by Insiders, or SEDI, at sedi.ca, but it's hard for individual investors to make much sense of the data. That's why we've enlisted the help of INK Research Corp. (INK stands for Insider News and Knowledge), a Vancouver company that provides paying subscribers with screening and analysis on insider activity taking place in Canadian public companies.
INK's Ted Dixon provides regular coverage of insider trading for Globe Investor where he looks at what's happening with individual stocks. Here, INK has taken a broader approach to show insider trading trends on a sector-wide basis and among 200 or so of the most widely followed Canadian stocks.
For this analysis, INK looked at net buying (after sells are factored in) over the 12 months to Nov. 30. It then compared this number with the history over the past four years. Note: we're looking at trading on public markets here and not at the exercising of stock options.
AltaGas Income Trust, TransAlta Corp., Intact Financial Holdings, Fairfax Financial Holdings and Talisman Energy were the top five names in terms of increased insider buying over the past year. "On the buy side, you can look at something like that and it tells you that insider sentiment towards that company is positive," said Mr. Dixon, INK's CEO.
He's more cautious about interpreting insider selling at individual companies because there are many reasons why a corporate director or executive might sell, such as estate planning, or to pay for a big purchase. So let's examine the selling trends in the sectors that make up the Canadian stock market.
Looking for stocks that remain undervalued after this year's sharp runup? How about telecommunications? It's the sector that has seen the biggest pickup in insider buying in the past year compared with the past four years.
"Perhaps it is not surprising to see telecom with a pickup in buying, given the flat performance of the sector over the past year," Mr. Dixon wrote in an e-mail commentary on the data his firm produced. "Insiders seem to be signalling some value opportunities exist there."
It's not as easy to draw similar conclusions about the buying in the materials and energy sectors. Mr. Dixon said it's less a reflection of enthusiastic insider buying than a decline in selling that came as commodity prices fell far off their 2008 peaks.
Commodity stocks have broadly seen increased insider buying on a net basis, but the gold sector has been a notable exception to the trend. "With bullion prices having risen so sharply in the past few months, insider selling has picked up above trend," Mr. Dixon said.
The most jarring trend on the selling side has to be the utility sector, which is the third-worst performer in the Canadian market this year and thus might be on the radar of bargain seeking investors. Mr. Dixon noted that the utility sector isn't just those dividend-paying, blue-chip electricity and pipeline companies any more. Rather, it includes independent energy producers and traders, which may not look as attractive as investments with energy prices way off their 2008 peaks.
In fact, there are a couple of traditional utility names - TransAlta and Fortis - among the 30 stocks with the biggest increases in net buying.
Mr. Dixon said financials and industrials were mid-pack in terms of the balance between insider buying and selling in the past year versus the previous four years.
"If the Canadian financial system and industrial economy were facing big risks, we would expect to see much more selling, but that is not the case," he wrote in his commentary. "However, the flip side of that suggests bargains in the two sectors are probably not easy to find; otherwise we would expect buying to be higher than it is."
Mr. Dixon said that for several stocks on the net buying list, actual buying by insiders has not changed significantly. Rather, the pace of selling has slowed considerably in the past 12 months from the four-year trend. Some examples of stocks where this is the case are Bonavista Energy Trust, Canadian Western Bank, Great-West Life, Potash Corp. and Russel Metals.
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Insider buying is most noteworthy for investors when it occurs in a stock that has not done well. You can view this as an indication that people inside a company are positive about the future, even if investors are not.
Of the names on the list of 30 stocks where net buying has increased the most, Manulife has been the worst performer in 2009 with a share price decline of almost 14 per cent. Investors may have been put off Manulife by the company's dividend cut last summer and its recent share issue to build up its capital base, but insiders appear confident about the future.
Investors looking for stocks with high dividend yields have to be cautious about what they buy because it's a weak share price that produces a high yield (share prices and yield move inversely). The weak share price is in turn an indication that investors have concerns about a stock.
But INK's research shows there are several high-yielding stocks where insider buying has picked up in the past year. TransAlta, Sun Life Financial, Great-West Lifeco were above 5 per cent late this week, and Fortis, Intact Financial, National Bank of Canada were above 3.5 per cent.
Income trusts are subject to a new tax in 2011, and that has created some uncertainty about how attractive they'll be as investments looking forward. Insider buying trends suggest an optimistic view about Freehold, AltaGas Income Trust, Cominar REIT, ARC Energy Trust and Bonavista.
Insider trading data is only one of many factors when considering whether to buy a stock. But given how far the overall market has come and the lingering concern about a pullback, it's somehow comforting to know you're buying into a company where insiders are doing likewise.
Rob Carrick