Tuesday, September 8, 2009

On Insider Buying and IBM

From E*Trade:

Insider Sentiment

Over the last five years there has not been an insider stock purchase at IBM.

There have, however, been many insider sales there, including a few within just the past month at $118-120/share, which is (slightly) above today's closing price.

Perhaps if IBM, which regularly buys in 4% or more of its outstanding shares each year while paying continuing shareholders only a modest dividend, would instead stop with the share buybacks and pay a large dividend, which might be north of 6%, its insiders would buy the stock instead of selling.

Why should the public buy the stock when no insiders buy? Why should not shareholders sell when insiders often sell?

Other stocks without insider buys in the last 5 years include stocks I own or have owned and that have strong charts with recent highs in stock prices, such as Teva and Ross Stores.

Bristol-Myers, with a long-depressed share price but a high dividend rate, has a decent insider buy complement; and Eli Lilly, with similar share and dividend characteristics, reports no insider activity at all in the past year save for granting modest amounts of stock options to directors at around the current stock price.

On the other hand . . .

Much has been made by some observers of the very high sell-buy ratio recently amongst insiders. This is not a "good thing" but also may be too soon in the cycle to be very worrisome. After a prolonged bull market, this ratio may be much more of a warning sign, however. Let us say that 2 years ago, your company's stock was $50, then within the past year it fell to $20, and now it has rebounded to $35. When it was $50, you may have been bullish and made personal plans as if it were going flat to higher. Now you may sell simply because you have been hit in the head with reality, because you need the money, because you're getting more options anyway, etc. My inexpert reading of history is consistent with this idea, which is that coming out of a recession, insider selling means less than after a prolonged bull market. Not all insiders are necessarily zillionaires, after all.

The above comments notwithstanding, I believe that IBM has been such a vocal bull on its own business prospects, and has gone to such great lengths to beat its own numbers, that it is upsetting to see NO insider buys over an entire 5-year period, including when the stock was far below today's price. Based on stock price:free cash flow, IBM appears to be a screaming buy in view of current high-grade fixed income yields; why is the stock not higher, and why are insiders not buy-buy-buying?

Copyright (C) Long Lake LLC 2009

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