Insiders Are Buying the Market's Most Hated Sector
By Graham Summers
December 12, 2007
Things are looking bullish...
The insider sales-to-purchases ratio was 13 in November. In other words, for every $13 corporate insiders took out of the market, $1 went back in.
I realize this doesn't sound terribly bullish, but remember that U.S. executives receive a ton of their pay via stock compensation. Stock options account for nearly half (48%) of CEO pay at Fortune 500 companies. So insider sales always outnumber insider purchases.
Because of this, anytime the sales-to-purchases ratio falls below 20, it's considered bullish... 13 to 1 is pretty darn bullish.
In dollar terms, insiders bought $297 million worth of stock in November. This isn't far off from the $330 million they bought in August before an 8% market rally. And in November, insiders only sold $3.8 billion worth of stock. That's the lowest November amount since 2002.
Insiders are typically early to a big move... and often precede the market by at least six months. So these recent purchases don't necessarily forecast a massive run-up in January. What they do forecast, however, is that by mid 2008, certain sectors should be outperforming the overall indexes.
Those sectors are homebuilders, regional banks, and Internet retail companies. Throw in asset management and oil & gas, and you've got 45% of the total insider buying for the month of November. Taken as a whole, these sectors only accounted for 7% of insider sales during October.
Homebuilder stocks are as attractive as toxic waste to the vast majority of investors, and the news is still horrible for these companies. Recently, Lennar announced it was selling 11,000 home sites – valued at $1.3 billion – to Morgan Stanley for just $525 million.
Meanwhile, insiders at the following homebuilders have begun buying:
Company |
Symbol |
Insider Purchases |
NVR |
NVR |
$52.4 million |
Meritage Homes |
MTH |
$14.9 million |
Brookfield Homes |
BHS |
$5.3 million |
Pulte Homes |
PHM |
$150,000 |
KB Home |
KBH |
$93,000 |
|
If you've got a contrarian streak, consider this list of what is likely the market's most hated sector as a jumping off point for ideas.
But keep in mind, insiders are usually early... While you're likely to make good money right now in homebuilders, it will be a bumpy ride.
Good trading,
Graham
