The recovery is supposed to be under way, right? But insider sales are at levels not seen in almost 2 years, which suggests there's still a bear out there.
A few tidbits of good economic data and generally better-than-expected profit reports have heated up the market once again on speculation the worst is really over.
Company insiders may be telling us the opposite.
While investors have lifted stocks even higher off the March lows, insiders have been quietly selling lots of shares of their own companies into the strength in the past month.
Ominously, insider sales now stand at levels not seen since late 2007, right before the current bear market began. And history shows that insiders are worth paying attention to, because they're the ones on the front lines.
The good news is that inside selling hasn't yet reached levels that portend a prolonged bear market. Instead, they could be signaling pullbacks that give you a chance to put money into stocks at lower prices.
But several sectors do appear destined for serious trouble, including consumer-oriented stocks and technology. Specifically, negative trends combined with insider selling suggest to me that First Solar (FSLR, news, msgs), J.M. Smucker (SJM, news, msgs), Moody's (MCO, news, msgs), Pulte Homes (PHM, news, msgs), Riverbed Technology (RVBD, news, msgs), CKE Restaurants (CKR, news, msgs) and Texas Roadhouse (TXRH, news, msgs) are particularly vulnerable.
The inside story
- An insider gauge tracked by Market Profile Theorems, a Seattle research shop, moved into bearish territory July 31 for the first time since November 2007.
- An insider sell-buy ratio tracked by Thomson Reuters has been hovering around bearish levels not seen since November 2006. It recently registered 53, meaning insiders pulled $53 out of the market for every $1 in stock they purchased.
Another insider sell-buy ratio, tracked by Vickers Stock Research, is now "well within the bearish range," says David Coleman, who analyzes insider activity for Vickers. It hasn't been so high since November 2007
Does this mean you should sell all your stocks and hide? Not necessarily. Insiders -- company executives and huge stockholders close to them -- don't always get it right, and market timing is tricky. If you are a long-term investor, it's probably better to wait out near-term turbulence.
The markets could resolve this insider bearishness by moving sideways for a while or with small and temporary corrections, says Michael Painchaud of Market Profile Theorems. We've seen few significant down days, offering better prices, during this summer rally. "Now you may have that opportunity," Painchaud says.
But he says several sectors are now look particularly vulnerable to bigger corrections. They include consumer discretionary stocks, technology, media stocks, software services, semiconductors, industrial products, business services and construction.
Troubled stocks
So to find stocks with significant insider selling that look vulnerable, I polled several investors and analysts who have been good at suggesting stocks to avoid in the past. They include Gradient Analytics, a research shop that uses earnings-quality analysis and other tools to spot troubled companies, and Whitney Tilson, a co-portfolio manager of the Tilson Focus Fund (TILFX) and co-author of "More Mortgage Meltdown: 6 Ways to Profit in These Bad Times." I also checked in with John Tabacco Jr. of LocateStock, a service that helps investors find stocks to borrow so they can go short. (Investors go short by borrowing stocks and selling them, hoping to replace them cheaper, later. Stocks in high demand by shorts often fall.)
First Solar: Too much of a 'good thing'
The selling: Members of the Walton family, heirs to the Wal-Mart Stores (WMT, news, msgs) fortune, have a huge stake. They sold $580 million worth of First Solar stock in late April and early May. The company's finance chief and a director also sold $4 million worth, according to Thomson Reuters. All sold in the $200-a-share range; the stock is now around $157.
The concerns: A global glut of solar-energy panels is putting downward pressure on pricing, Tabacco says. First Solar announced July 31 that it will offer rebates on equipment in Germany, sparking a 10% decline in the stock. Tabacco had a negative call on the stock before last week's decline, and he thinks there's more downside to come.
With credit still tight, it's tough to fund alternative-energy projects. Germany and Spain have cut subsidies for solar, which hurts demand. Warning that First Solar's rebate program could start a price war, Credit Suisse analyst Satya Kumar last week cut his price target on the stock to $135 a share. But he said it could trade as low as $120 as earnings expectations fall.
First Solar's finance chief sold to diversify his investments; the sales were just a small portion of his overall holdings, and he still has large exposure to the stock, a spokeswoman said.
J.M. Smucker: Smart sellers lightening up, again
The selling: Three executives with great records for timing sold more than $1.2 million worth of stock in late June and mid-July for around $48 to $48.50 a share.
The concerns: J.M. Smucker's last quarter was as smooth as peanut butter without the chunks. Smucker enjoyed strong coffee sales, as consumers opted for Folgers over $5 coffees from Starbucks (SBUX, news, msgs). Sales of other products were up 3%, mostly on price increases.
The real worry about the stock is that insiders have shown great timing for getting out of the stock during summer strength. Last summer, they sold more than $2 million worth of stock for $47 to $55 a share. By March, the stock was near $34. In summer 2007, insiders sold $16.5 million worth of stock in the low $60s. Six months later, the stock was near $45.
J.M. Smucker policy limits insider trading to two business days after quarterly earnings releases and prohibits trading when insiders have material information not available to the public, a company spokeswoman said.
AutoZone: Riding for a fall
The selling: In mid-July, savvy hedge fund manager Eddie Lampert of ESL Investments sold $118.2 million worth of stock for $157 to $160 a share. He sold $8.9 million worth in June for about $156 a share. Lampert has been a smart trader of the stock, purchasing $49 million worth as recently as October for around $100 a share.
The concerns: Everyone loves free money, so the federal "cash for clunkers" program has been an enormous hit. Car buyers ran through the first $1 billion in less than a week -- money that was supposed to last through November. Now, Congress is rushing to add more.
None of this is good for AutoZone, which sells parts that keep older cars -- clunkers -- on the road. "There is so much government incentive to buy a new car, why would people be going to AutoZone?" LocateStock's Tabacco asks. At his Web site, demand to borrow AutoZone stock for shorting has been brisk, which is a negative sign. Lampert still owns 20 million shares, or 37.6% of the company.
Pulte Homes: '3rd wave' may swamp prospects
The selling: Executives sometimes reduce exposure to their stocks by using financial tools such as options or "forward sales" -- agreements to sell their stock in the future at prearranged prices. These transactions don't show up as sales in the common insider databases. Pulte Chairman William Pulte used forward sales to reduce exposure to an enormous 4.75 million shares of his company's stock in February, according to Thomson Reuters.
The concerns: Housing stocks look cheap, but homebuilders face so many problems that they aren't good buys. Many analysts expect a third wave of foreclosures by homeowners who had decent credit but are now losing their jobs. This will add to already high inventories of houses on the market, making it tougher for homebuilders to move their houses.
"Homebuilder companies may look cheap . . . but their earnings are collapsing," investment adviser Gary Shilling wrote in the August issue of his newsletter Insight. Another problem: "Excessive inventories and write-offs of surplus land are destroying their balance sheets," Shilling says.
Moody's: Buffett throwing in the towel
The selling: Warren Buffett famously says his favorite holding period for a stock is "forever." So when he throws in the towel on a stock that is weak, you know there must be trouble. In July, the Oracle of Omaha filed notice on sales of 8 million shares of Moody's for prices between $26.60 and $28.70 a share. He initially purchased the stock about nine years ago at lower prices and bought more along the way.
The concerns: Critics fault Moody's and the other rating agencies for contributing to the current financial mess by stamping "AAA" ratings on unsound structured finance instruments backed by dubious, low-quality mortgages. "Moody's AAA rating was the gold standard, but they have almost destroyed the credibility of that AAA rating," Tilson says. "They have tarnished the brand substantially and perhaps permanently."
Another challenge: Moody's got more than half its profits during the housing bubble from rating structured finance products backed by mortgage debt. "That business is gone, we think permanently," Tilson says. So earnings will continue to be very weak, he says. Tilson is short the stock.
Riverbed Technology: High-octane sales
The selling: Since early May, insiders have sold $12.4 million worth of stock, according to Thomson Reuters.
The concerns: Almost all of the sales were done under special Rule 10b5-1 plans. These are prearranged sales meant to exempt insiders from selling ahead of any potential bad news, because they are planned far in advance. The problem here is that research shows these kinds of sales are actually more predictive of stock declines than straight sales.
The company also faces some challenging business trends, because it recently reported the lowest level of new-customer sales in two years, says Chad Potter of Gradient Analytics. Since the company needs new customers to see increases in sales from service and support, Riverbed "may struggle to meet growth expectations later in 2009 and into 2010," Potter says.
Restaurant stocks: Smaller portions ahead
The selling: Insiders with great records for knowing when to exit were selling at CKE Restaurants in May and July, while insiders with good records were selling Texas Roadhouse stock in May and June. The sales at Texas Roadhouse "were for diversification and estate planning, and represent a small portion of their holdings," a company spokesman said.
The concerns: I don't have any knocks against these two companies per se; it's more of a sector call. Consumer discretionary stocks have had some of the most significant selling of late, and in that group, restaurants look particularly vulnerable, says Painchaud, of Market Profile Theorems. So these two, with selling by especially smart insiders, look like they might face problems. This should be no surprise. Economists expect only a modest recovery at best, and consumers are likely to continue to be in a savings mode as they repair their finances.