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Follow the Leader?

| April 20, 2020

Insider Buying Soared in March While Markets Fell

Famed investor Peter Lynch was noted as saying that "insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise."

Executives at big US companies bought their own stock in droves in the month of March, capitalizing on a sharp drop in equity prices and instilling confidence into the financial markets as they’ve risen from their lows. The week of March 9th represented the first time where there was more insider buying than insider selling in over a decade, with insiders purchasing over $682.88 million of stock. (1) The amount of stock purchased represented an increase of over $400 million from the prior week. (2) For the entire month of March, over $1.37 billion in stock was purchased by insiders, more than five times the three months prior average of $235 million.(3)

Insider buying occurs when corporate executives buy stock in their own companies. High amounts of insider buying activity are considered a bullish signal and often serve as a vote of confidence in the future growth and development of the company. Corporate executives have a unique familiarity and understanding of their companies, and their increased buying interest may be taken as a reassurance that the company is undervalued or that the new strategies and initiatives that are being put into place are expected to yield increased profits and revenues. More insiders bought stock in March than at any time since the financial crisis in 2008, with many analysts and investors taking this as an encouraging sign for these companies and the economy as a whole.(4) Their belief is that if insiders were buying so fervently through the lowest points of March, they must be expecting a recovery and an appreciation in values in the near future.

While increased levels of insider buying cannot successfully guarantee positive market performance, executives loading up on their shares will go a long way toward restoring consumer confidence. During a crisis in confidence, insider buying is symbolic of strong leadership stepping up to lead the way forward when no one else will do so. It was in 2016 when JP Morgan Chase CEO Jamie Dimon decided to purchase $26 million worth of shares in his company, in what later became known as “The Dimon Bottom”, as his share purchase coincided with the low point in the markets for bank stocks.(5) JP Morgan stock had more than doubled from that point through 2019 and is still up 70% from that purchase.(6) Dimon’s purchase of shares injected a massive confidence boost into the banking sector, with many other banking executives following suit in leading the banks out of their slump. Similar purchases are being seen now by corporate executives across all industries. With Dell Computers trading down over 40% from its recent highs, Michael Dell has purchased shares worth over $26 million.(7) MGM Resorts International Director Keith Meister and other insiders purchased over $27 million of corporate stock at the end of March, after seeing share prices cut in half for 2020. (8) Even the most beaten down of industries have seen significant buying, including retail malls and energy. CEO  David Simon and Chairman Herbert Simon of Simon Property Group recently bought over $19 million of stock, with their stock down over 67% in the past three months.(9) In the beleaguered oil and energy space, Chairman Richard Kinder of Kinder Morgan has bought over $25 million of his company’s stock in March (10). Even Carl Icahn, 10% owner and insider of Hertz Rental Cars, has purchased a massive $85
million worth of corporate stock in March with the car rental company trading down significantly on the year. (11)

It remains to be seen if the torrid pace of insider buying will continue. Insider buying and selling tends to be fairly cyclical in nature, often waxing and waning according to industry regulations that prohibit shares from being bought or sold at certain times of the year. Regardless, the buying that was evidenced in March is a strong sign that corporate executives considered the shares of their companies significantly undervalued. While executive tenure can be highly variable in nature, the executives referenced in this article have all served in an executive capacity in their respective companies for many years. David Simon has been with Simon Property Group for over 30 years.(12) Michael Dell founded Dell Computers in 1984. Their interest in these companies are long term. Though their buying interest in the companies they serve cannot indicate when their stock valuations are at the lowest or ready to appreciate, they may serve as a fairly accurate indicator of when these stocks and the markets are undervalued.