As investors dump stocks and mutual funds because of fears of global recession, corporate executives are quietly scooping up thousands of shares of their own companies at what they see as bargain-basement prices.
“It got so ridiculously low that it was an investment opportunity that was hard to pass up,” said Stanley Erck, who runs Novavax, a Rockville-based vaccine maker. Two weeks ago, he helped himself to 50,000 shares of the company after the market hammered the price down 30 percent, to $1.24 per share.
Across the country, thousands of corporate insiders, including dozens in the Washington area, have taken this month’s panic selling as an opportunity to buy nearly $2 billion worth of their shares at the lower prices. Experts say the massive buying volume may be a sign that chief executives don’t think the economy is as bad as investors fear.
“They are really buying the shares of their companies in a big way,” said Nejat Seyhun, a finance professor at the University of Michigan and author of “Investment Intelligence From Insider Trading,” a book that tracks decades of trades by corporate insiders.
During normal times, insiders selling shares tend to outpace buys by a 2-to-1 ratio, Seyhun said. But this month, markets have seen a complete inversion, with nearly two buys for each sell, according to data Seyhun compiled for The Washington Post.
The reversal is a “very bullish” signal for the market, Seyhun said, and could indicate a market bottom. Surges in stock purchases by corporate insiders helped spot market bottoms after the 1987 stock market crash and the financial crisis of 2008, he said.
This predictive power stems from corporate insiders’ ability to often better gauge what’s ahead for their companies than outside investors and analysts. When the price dips below a certain point and they swoop in to buy shares, it can signal the market is too pessimistic on companies’ future profitability.
The buying activity also has implications for the wider economy. It comes when many investors are selling stocks and loading up on safer bets like gold because of fears the United States may be entering another recession. But with executives loading up on shares even in recession-exposed industries such as hospitality, real estate and financial services, the odds of a second recession become more questionable.
“It is a sign that at least corporate America is saying, ‘We can avert . . . a double-dip recession,’” said Diane Swonk, chief economist at Mesirow Financial in Chicago.
Locally, dozens of companies from nearly every sector of the economy have seen their executives and directors buy shares throughout August’s sell-offs. From the small, Maryland-based health-care enterprise Novavax to industrial manufacturer Danaher in Washington and student loan giant Sallie Mae in Virginia, executives in the region have scooped up nearly $5 million worth of shares in August, according to regulatory filing data analyzed by The Post.
David Gladstone, chief executive of the McLean-based investment company Gladstone Capital, bought 10,000 shares of his firm’s stock after it sank 12 percent at the beginning of August. Gladstone could see reason for some of the sell-off; gloomy data has pointed to a weakening economy, and he has backed 59 small and mid-size businesses that often operate in recession-sensitive industries such as retail, manufacturing and cargo transport. But he thinks investors were overselling his stock on fears of recession.
“Sure, a recession will hurt us somewhere, but the impact will be mild. We just don’t see it coming,” he said, adding that many of the businesses in which he has invested are seeing sales continue to grow.
So when Gladstone Capital’s shares dipped to $7.85, he pulled the trigger because at that price, the stock’s annual dividends alone were worth more than 10 percent of its price.
Ronald Paul, chief executive of Bethesda-based Eagle Bancorp, bought about $126,000 worth of his company’s stock in the first half of the month. For him, it was the market’s negative reaction to the U.S. credit downgrade and uncertainty over Europe’s debt crisis that created a buying opportunity, since he doesn’t think the developments will have any effect on his business.
“Eagle Bank didn’t change as a result of the downgrade,” Paul said on a day when the blue-chip Dow Jones industrial average fell a nail-biting 416 points. “So the fact that the market cracked as it did is just an opportunity to buy.”
The next day, Paul bought $93,704 worth of shares, according to a regulatory filing.
More than 2,900 insiders at some of the biggest corporate behemoths in the world have noticed similar buying opportunities this month, according
to data compiled by SECForm4.com. Exxon Mobil, Berkshire Hathaway and General Motors, top-ten members of the Fortune 500 ranking of America’s largest corporations, have each seen their directors scoop up shares this month. America’s financial sector, which has spearheaded this month’s sell-offs, also saw heavy buying, with insiders at banking giants Wells Fargo, Morgan Stanley and J.P. Morgan Chase loading up on shares.
The insiders’ buys total nearly $2 billion, according to InsiderScore, a New Jersey-based company that tracks regulatory filings for corporate insiders’ stock purchases.
“This is the type of activity that has signaled market bottoms, and this is unusual in terms of the number of people buying, the number of companies seeing insider buying and the number of dollars flowing into stocks,” said Ben Silverman, director of research at InsiderScore.
Indeed, the last time the market saw so much insider buying activity was in March 2009, when the market hit its post-financial-crisis bottom and began a two-year rally. Silverman said that insider purchases made a “dead perfect call” of when the market would bottom: March 6, 2009.
But Seyhun, the University of Michigan finance professor who wrote the book on insider trading, isn’t ready to call August’s buying frenzy a full-blown “buy” signal.
“If there is sustained buying at these levels for three to six months, that would be a very strong signal,” he said.