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A Six-Month Payday: Insiders Snap Up This Discarded SectorBy Graham SummersMonday, January 28, 2008 Earnings are falling and insiders are buying. That's the big trend in the stock market right now.
The blended earnings growth rate – which combines announced earnings and earnings expectations – is negative 19%, even worse than the negative 9% previously expected.
We had negative earnings growth in the third quarter last year. If the fourth quarter ends in the red, it will be the first time we've had two consecutives quarters of negative earnings growth since the end of 2001 and the start of 2002. The S&P 500 fell 14% the following year.
Of course, we're seeing a very different bust now than we did back then: one driven by a fall in overvalued real estate vs. one driven by overvalued technology companies. But the market is driven by earnings. And if earnings crumble, share prices are likely to join them.
However, insiders continue to find attractive buys in today's rocky climate. Since 2003, insiders have averaged $60 million in January purchases... This week, they cleared that mark. And total sales entering the final week of the month are only $993 million, less than half of the average $2.6 billion since 2003.
Far more impressive is the current proceeds-to-cost ratio, which takes into account options activity. Right now, it stands at 0.87. In terms of actual market value, this month insiders have bought more than they sold.
That's happened only six times since 1990. In all but one of these situations, the stock market was higher six months later, up an average of 12% if you don't count the one negative return (a disastrous –28%).
Financial stocks were the most heavily bought sector among insiders in the last month. However, it was also one of the most heavily sold.
The consumer discretionary sector (things like clothes and toys) and the consumer staples sector were the second and third most popular with insider bulls. These are both sectors that have been slammed by a slowdown in consumer spending and the expected recession.
Consumer staples, in particular, interests me. As you can see by the chart of the Consumer Staples ETF, this sector is still in an uptrend, despite the recent market selloff.
 The Staples ETF is trading at 13 times cash flow. A truly horrific future is discounted into these stocks right now. I guarantee you several great companies are being lumped in with the junk.
Insiders favor the following three:
If you're interested in putting your money with the insiders, you might want to start here.
Good trading,
Graham
Further Reading:
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