As Everyone Exits, Insiders Arrive

As Everyone Exits, Insiders Arrive
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By Dimitra Defotis, Barron's | 23 October 2008

Among the casualties of today's market rout are some prominent executives who sold shares to meet margin calls. Among the potential beneficiaries? Insiders at other companies who scooped up stock at hugely depressed valuations.Table: Shopping Spree

Some of the world's wealthiest men, including Mexican investor Carlos Slim Helú and Microsoft's (ticker: MSFT) Bill Gates, also opened their wallets, taking bigger stakes in the past month in companies they already own. So did hedge-fund manager Eddie Lampert, whose ESL Investments bought $27.6 million of AutoZone (AZO) as the stock hit a two-year low. Lampert, who controls 38% of the company, has been buying since April.

Insiders Sell Shares For Many Reasons. But They Buy For Primarily One: A Belief The Stock Is Going Up.

Both fresh purchases and the absolute level of insider ownership send a clear message, says one New York hedge-fund manager. "I love to know that it's people putting their own money at risk," he says. "It's a bullish sign if I am trying to build an investment case" for a stock.

Four weeks ago, the ratio of insider buyers to sellers was nearly even, according to InsiderScore. In the week ended Oct. 14, however, buyers trumped sellers by three to one, with much of the buying concentrated in shares of smaller companies. Insider buying was strong in shares of small regional banks and energy-exploration and pipeline concerns.

Retailers also attracted insiders, notwithstanding fears that the coming holiday season may be the worst in years for the industry. In early October, in one of the market's worst weeks on record, the CEO of discount shoe seller DSW (ticker: DSW), Jay L. Schottenstein, shoveled more than $15 million into his company's stock, paying an average of less than $12 a share; the stock now trades for $11.50. Schottenstein's confidence says something, given his retail background. He's the former CEO of American Eagle Outfitters (AEO), and sits on the boards of American Eagle and Retail Ventures (RVI), parent of Filene's Basement.

Another apparent retail fan is Slim, who invested in industrial and financial businesses during Mexico's 1980s debt crisis. In early October, a Slim-controlled trust bought nearly $11 million of Saks (SKS) stock, boosting his already significant stake in the parent of tony Saks Fifth Avenue. Saks has fallen more than 70% in the past year, to around $5 a share. Slim paid about $7 a share.

Gates continued to boost his stake in Republic Services (RSG), the waste hauler. From Aug. 5 to Sept. 29, he invested $256.7 million in Republic, at an average price near $33. Today, the stock is around $22. Waste Management (WMI) recently dropped its bid for Republic.

When a gaggle of high-ranking officers buys, that's also noteworthy. At AAR (AIR), a Chicago-area aviation and aircraft-leasing concern, the CEO and five directors picked up more than $461,000 of stock at an average of $11.86 a share, just below today's price. Insiders at many pipeline master limited partnerships were buyers in recent days (See "How to Energize Your Portfolio," Oct. 13). Robust Profit Pipelines

The Bottom Line:

During one of the market's worst periods ever, insider buyers trumped sellers by three to one. Executives are snapping up retailers, energy outfits and even small financials. Financials aren't without fans, either. Five insiders bought shares of MetLife (MET) recently, reversing a multi-year trend of planned sales. At credit-card issuer Discover Financial Services (DFS), the CEO, CFO and chief operating officer bought shares in early October at an average of $11.55 a share; the stock now trades around $10.

Buying on insiders' heels isn't a foolproof path to profits. But tracking the so-called smart money often leads to bargains.

  M O R E. . .


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