Insider Trading Hits a 2-Year High

Between August 3 and August 9, more insiders bought stock in their own companies than in any five-day period since March 2009, when the U.S. equities benchmark reached a 12-year low. With valuations down 25% below their five-decade averages, and nearly $3 trillion erased from U.S. equities in the last three weeks, sixty-six insiders at 50 S&P 500 companies bought their own stocks in just 5 days.

Analysts call the move bullish, as insiders have the best insight into their companies’ prospects, despite the fact that the benchmark gauge for U.S. shares is down to within 30 points of a bear market. “Nobody knows a company better than the people running it,” says Shawn Price, who manages $2.4 billion at Navellier & Associates in Reno. “It’s a positive sign that they are committing their personal capital.”

CEO James Gorman and two other managers purchased a total 175,000 shares of Morgan Stanley (NYSE:MS) after they fell to their lowest price since March 2009. The S&P 500 is down 18% from this year’s high on April 29, spurring CEOs, directors, and senior officers to buy. Gorman’s purchase of 100,000 shares was not only his first since joining Morgan Stanley in 2006, but the largest acquisition made by any of the firm’s executives in over four years. Morgan Stanley shares had fallen 19% between July 21 and August 4, the day of Gorman’s purchase. The stock has since fallen another 17%.

General Motors (NYSE:GM) CEO Dan Akerson purchased $250,500 in shares just one day before the stock fell 6.3% to its lowest level since its November IPO. GM shares are now down 32% in 2011. Akerson bought 10,000 shares for $25.05 each; after rallying 4.18% today, the stock is now trading at $24.91 a share, down only slightly below its valuation on Tuesday, when Akerson made his purchase.

MEMC Electronic Materials Inc. (NYSE:WFR) CEO Ahmad Chatila and five other officers bought a combined 468,057 shares of the chip maker on August 5, when the stock had fallen to its lowest valuation since October 2002. On August 9, the day the transactions were disclosed to the public, the stock rallied 19%. Calgene Corp. (NASDAQ:CELG) chairman and CEO Robert Hugin acquired 10,000 shares in his company on August 8 after they fell to a five-month low, and CFO Jackie Fouse has already bought shares on three separate occasions this month.

Between August 1 and August 10, a total of 919 insiders bought stock in publicly listed U.S. companies, just short of the monthly average of 1,065 transactions compiled from data dating back to January 2004. In the first 10 days of March 2009, about 1,390 insiders bought stocks. According to Daniel Genter, who oversees about $3.7 billion as president of RNC Center Capital Management, “The insiders are saying that the lower valuation is unreasonable because they believe the earnings power of their companies is likely to go up.”

And many of them may be right. Earnings per share among the S&P companies releasing quarterly results since July 11 have increased a total of 17%. Three-fourths of the companies have beat analysts’ forecasts, and sales rose an average of 13% during the last quarter. Of course, Michael Yoshikami, chief investment strategist at YCMNet Advisors, reminds us that, “Insiders can be wrong and get carried away by emotion. Just think about all the technology executives who didn’t sell at the highs because they were overly optimistic.”

Furthermore, the end of earnings season always leads to an increase in insider transactions because none are allowed before the announcements. Since July 11, 427 of the S&P’s 500 companies have reported their earnings.