Stock Buybacks vs Insider Buying: 70:1 Ratio
“While insiders are willing to use corporate cash to try to support the value of their stock-based compensation, they don’t seem to think their stocks are attractively priced.“
-Charles Biderman, Trimtabs
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Over the years, I have been critical of Trimtab’s Charles Biderman (See this, this, this and this). I suspect much of the visibility his model was dependent upon to track investor money flows had disappeared into dark pools or derivatives. Thus, the ability to peer into mutual funds asset buying and forecast equity movements was compromised.
My critiques of Biderman’s research has been he has lacked the data to support his views, which were too bullish heading into the 2007 peak, too bearish during the 103% rally. Examples include a late 2007 comment that “Fear and ignorance seem to be gripping retail investors” (Doh!) or the April 2008 claim that the economy was emerging from the recession (Um, not exactly).
However, in a recent research report, TrimTabs seems to have some ugly Insider Buying data that supports their bearish views.
Biderman observes that while US firms spent $124 billion in stock buybacks in Q2, insiders bought less than $2 billion of company stock with their own money. That 70:1 ratio is a sharp contrast between “what insiders are doing with their own money and what they’re doing with the money of the companies they manage.”
At the 30 firms with the biggest buybacks in 2011, over $168 billion was spent purchasing shares, while there was zero insider buying at 24 of these firms amounting to less than $10 million. Cherry picking aside, that is still a ratio of 16,800:1.
I have not crunched the numbers to see exactly how probative extreme Insider Buying (or the lack thereof) is to future market performance. But it is an intriguing data point that may be worth noting.
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Source:
The real story behind the market ‘boom’
Brett Arends
Marketwatch, June 29, 2011
http://www.marketwatch.com/story/the-real-story-behind-the-market-boom-2011-06-29
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July 1st, 2011 at 8:10 am
Insiders aren’t always right but they have a hell of a lot more insights than the man on the wall street. Angelo Mozillo certainly made the right sell decisions – and mostly within the SEC requirements – even though he made some settlements. he said he was going to sell and he did
July 1st, 2011 at 8:19 am
I would guess that the insiders at the 30 firms with the biggest buybacks already get saddled with plenty of their company stock via their compensation contracts, so I’d hesitate to draw too many conclusions from this.
July 1st, 2011 at 8:37 am
but aren’t buybacks close to record highs, 124bn in Q2 is a huge number, and CEO’s private wealth still paralyzed from the recent events, feels natural.
July 1st, 2011 at 8:40 am
Excellent point Kid D.
and ex1 — I don’t disagree with you– that is why I was not willing to say this is the data point that marks the end of the bull cycle.
It is however, an intriguing view of insider psychology.
July 1st, 2011 at 9:12 am
Kid D’s point would have merit if it could be shown that insiders have only recently been highly compensated with their own companies stock. But I believe that insiders have been saddled with company stock as compensation for many years. Thus, I believe Trim Tabs does have a data point that may not be consistent with the past and may call into question the current valuation of large company stock prices.
July 1st, 2011 at 9:28 am
@inessence – good point. although Trimtabs’ data set for this is insignificant, going back to only 2004. That means they basically only captured one big buyback wave (2005-6), so it’s not clear that the current level is really an outlier.
I was just thinking from my own personal experience – stock was always a big part of our compensation, and no one who I ever worked with over the course of my career ever even THOUGHT of buying more. In fact, everyone I know (except for one buddy of mine) sold each vested share ASAP – it was just common sense: we were already levered to our firm’s performance and the market’s performance.
The fact that we didn’t want to buy more stock in our company wasn’t any sort of statement about our thoughts on its valuation though. (and I should note, I’m not talking from experience about people who would be classified as “insiders” and have their purchases and sales reported – ie, mine would not show up in the Trimtabs data, just as a point of clarification)
July 1st, 2011 at 9:29 am
Barry-it’s always interesting to see what insiders are doing with their money, however, academic studies have shown that following management buy/sell patterns has virtually no predictive value for future stock performance.
What would make this study more interesting is seeing how the 70:1 ratio compares to historical periods. It’s possible that differences in the ratio have some predictive value?
July 1st, 2011 at 9:51 am
Pay Tally Up 19% for Finance Chiefs
http://online.wsj.com/article/SB10001424052702304447804576413700017777930.html
With the tough times these fair, honorable corporate elite are having coupled with the justifiable fear of Obama’s radical agenda to return to the income tax rates of horrifying Clinton-decade-of-American-collapse – it’s no wonder these self-made, alabaster-white pillars of the community, god-fearing, church-going givers to the sober, erudite Chamber of Commerce are selling everything they’ve got, and probably moving out of the country even though most of the world are either Obama’s friends …or he’s illegally bombing them silly.
July 1st, 2011 at 10:05 am
The statistic that needs to be weeded out is how much of the buy back money was used to purchase insider shares at the top of the price range.
Give the cash back to shareholders in a one time dividend. Buybacks are an insider advantage and history has shown, can only support stock price for a short period of time.
July 1st, 2011 at 10:09 am
i am thinking that they aren’t buying for at least 2 reasons. one why should they buy if what they have is going up in value, they are in effect getting more money by doing nothing. and why should they buy when the price is going up and may go down since the impetus for price increase is temporary. and unless they know when the buys will stop, they would have a hard time timing their purchases and sales to make a profit. and that might even be noticed by regulators (who might even regulate) and they would have some explaining (if not more problems than that) to do.
July 1st, 2011 at 11:19 am
Stock Buybacks vs Insider Buying at 70:1 Ratio — Don’t they call that ‘the rats leaving the ship’?
July 1st, 2011 at 11:39 am
I don’t see any reason to draw any conclusion from this comparison. Companies repurchase stock because they don’t have alternative investments that will produce a return comparable to their existing lines of business (technically, they shouldn’t invest at less than their “cost of capital”). Shareholders would look askance at most companies if they began investing surplus cash in the stocks of other companies to chase returns. Where’s the competitive advantage? Executives have no such restriction on their investment options for their personal wealth and, like everyone, would be prudent to diversify.
Wesl’s point on buybacks to “purchase insider shares” should be broken out into three separate points:
1) Share repurchases executed when there is a “bubble” in the company’s share could potentially destroy value for shareholders who do not participate by proportionally selling their holdings (e.g., if the company buys back 1% of its float, a shareholder sells 1% of her holding at the same time).
2) Issuance of stock options or directly compensating employees with stock dilutes shareholders – which may be offset by the value added by the retention of talent.
3) Offsetting this dilution is sometimes given as one of the justifications for share buybacks, however, the decision to compensate employees with treasury shares or by issuing new shares should be based on a totally different set of calcs than the decision to use cash to repurchase shares.
July 1st, 2011 at 11:59 am
BR: props. You pay attention to the data and not the source. If an interesting data point comes up, you are willing to check it out instead of dismiss it out-of-hand. This is why I have been reading you for… geez, years now.
July 1st, 2011 at 12:38 pm
BR – great topic (and great blog).
Check out an interesting paper last year from two profs at UCDavis, Griffin and Zhu, with some solid data on how insiders use buybacks to enhance mgmt’s gain from stock options at the expense of outside shareholders (e.g., timing the buybacks to boost share prices when insiders want to sell; favoring buybacks over dividends; etc.).
Also shows buyback companies grant more options, have more insider shareholding, have weaker corporate governance and, surprise, are generally less profitable than dividend increase companies.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1316623
July 1st, 2011 at 1:39 pm
“…Now, in the days of the free market, when our country was a top industrial power, there was accountability to the stockholder. The Carnegies, the Mellons, the men that built this great industrial empire, made sure of it because it was their money at stake. Today, management has no stake in the company!
All together, these men sitting up here [Teldar management] own less than 3 percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than 1 percent.
You own the company. That’s right — you, the stockholder.
And you are all being royally screwed over by these, these bureaucrats, with their steak lunches, their hunting and fishing trips, their corporate jets and golden parachutes.
Cromwell: This is an outrage! You’re out of line, Gekko!
Gekko: Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice presidents, each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year, and I’ll bet that half of that was spent in all the paperwork going back and forth between all these vice presidents….”
http://www.americanrhetoric.com/MovieSpeeches/moviespeechwallstreet.html
Still, to this Day, *Waay, too, True.
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BR: props. You pay attention to the data and not the source. If an interesting data point comes up, you are willing to check it out instead of dismiss it out-of-hand. This is why I have been reading you for… geez, years now.
x2
July 1st, 2011 at 4:39 pm
Barry,
I think the more important issue is not if insiders are buying as they are doing stock buybacks but if they are selling. They may not have the confidence in their stock to buy more but at least they are holding on to it as they push the prices up with investor dollars. If they were then to turn around and dump shares after having goosed the stock price that would be very disconcerting to me as a shareholder
July 1st, 2011 at 8:14 pm
Aww come on….I expect better from people who engage in quantitative analysis.
What are the proportional percentages of discretionary funds available for investment? If the companies have 50 times more surplus capital to invest than their insiders, then there isn’t any significant discrepancy here at all.
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BR: As I noted, i have never seen proof there is any probabitive value here– I suspect there is very little — but it still caught my eye as an extreme.
July 6th, 2011 at 11:31 am
[...] week, I mentioned the Insider Buying Ratio was at extreme levels — but I had to admit I had no idea what that meant for future market [...]