Those in the know are now saying it’s time to buy this pullback.
Last week, insiders — the ones with the front-row seats on business — bought more of their company shares than they sold by a ratio of 1.25. That’s unusual. Typically, they sell about twice as much as they buy. This means the buy/sell ratio is normally more in the 0.5 range. These numbers come from Vickers Stock Research.
A long-term eight-week buy/sell ratio Vickers uses to track insider activity at New York Stock Exchange and American Stock Exchange companies has also turned bullish.
The bullish insider tone lines up the golden trifecta of signals I look for to make overall market calls in my stock newsletter, Brush Up on Stocks.
To identify a bottom in a selloff, or get close, I like to see marked negativity among those who are less in the know, meaning 1. investors and 2. the media, and 3. clear bullishness among those in the know, or insiders.
Investors: Various sentiment surveys and put/call ratios I track, along with the VIX (VIX) now show that investors are pretty negative, with the S&P 500 Index (.SPX) losing as much as 10% since September. They are not at the extremes we see at the bottoms of bear markets. But they are close.
The media: As a rule, I never watch financial news shows like CNBC because the risk-reward is unfavorable. A lot of times you won’t learn much, but there’s a big chance you might get drawn into dangerous groupthink — the ultimate hazard for returns.
Recently, though, I’ve been checking out CNBC clips, particularly the free-for-all panel discussions. Commentators seemed downright fearful and a bit panicky in the market selloff late last week. This is a bullish sign, in the contrarian sense.
They’ve regrouped and calmed down a bit this week. We may need to see more negativity from the press to mark a precise bottom. But we are close. A clear sign would be market rout stories on the front pages. Journalists offer a great read on sentiment because they are good at understanding what’s on the mind of the public. They share those insights through story lineups.
The bottom line: While we don’t see quite enough negativity from investors and the financial press, we are close enough. Especially now that insiders have turned bullish. So I began telling my subscribers this week to finally get more aggressive in buying this pullback, after suggesting they raise cash through much of the summer and early fall.
Here’s what to buy:
Elon Musk may seem like a crazy man at times, but he’s also crazy about his company’s stock. After he bought $9.8 million in early May, I suggested Tesla (TSLA) in my stock letter at $302. It’s been a wild ride since then, with decent gains along the way.
He put another $25 million into the stock at $345 in June. This week Musk confirmed his confidence in his company by purchasing another $10 million worth at $335.
Shouldn’t we be afraid of Musk? I don’t think so. Musk may seem whacky, but geniuses often are. Get used to it. Read biographies of Steve Jobs to see just how off the wall geniuses and “think different” visionaries are. Musk is a visionary, too, and this put him on the cutting edge in electric vehicles. So he has a lead. Plus his cars are just fun to drive. This explains the robust demand. Tesla just reported a 105% increase in car deliveries to 84,000 compared with the second quarter. It also reported free cash flow of $881 million. Musk reiterated guidance that Tesla will be self-funded from here.
This stock (TXN) is down because it guided for a weak fourth quarter. Investors also fear the end of the current chip cycle is coming. But the world’s largest analog chipmaker is literally embedded into the products of scores of companies that make cars, and consumer and industrial electronics. These customers resist the cost of switching suppliers. Texas Instruments also has superior design know-how. If the Internet of Things ever happens, Texas Instruments will be a play on that trend.
This stock is off 22% in four months. In the weakness, a director bought $1 million worth of stock at $91.70. It’s bullish when insiders challenge the market, or consensus, with a big contrarian purchase.
Here’s another situation where an insider is buying in size in a sharp pullback. The shares of this defense contractor (GD) were down 17% in October and 25% since April. A director just bought at $170. General Dynamics beat on third-quarter earnings but that was mainly because of tax-related gains. Investors don’t like one-off gains. So they sold. But General Dynamics is a well-run aerospace and defense company, which should benefit from the ongoing growth in defense spending.
If you’ve ever purchased an iShares exchange traded fund, you’ve contributed to the bottom line at this company, which owns the franchise. You are not alone. BlackRock (BLK) is the largest money manager in the world, with $6.4 trillion in assets.
As with other names here, insiders are buying after a huge decline. This stock retreated 18% in October, and 32% since last December. Asset managers typically get hit hard in downturns on concerns that a bear market will impair growth. It’s too early to predict that a bear market is here, so I think these worries are overblown. So does the insider who just made a $1.6 million purchase up to around $410.
I normally don’t follow buyers who qualify as insiders merely because they own 10% or more of a company’s stock. Sometimes, though, 10% owners have consistently good records. That’s the case with Appian (APPN), which helps other companies develop and deploy software.
The “insider” is the New York-based hedge fund Abdiel Capital Advisors. Within three months after suggesting Appian in my stock letter March 29 at around $26 because of Abdiel buying, the shares advanced over 67%. Now that the stock has retreated, Abdiel is buying again.
I also like Appian because it’s a founder-run company. Founder-run companies often outperform. And the founders have a controlling stake, which gives them the freedom to think long term. This can bring out better strategic thinking, as we have seen with Amazon (AMZN), Facebook (FB), and Netflix (NFLX) other founder-controlled companies I suggested years ago, which went on to do well.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested TSLA, TXN, GD, BLK, APPN, AMZN, FB and NFLX in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.
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