When Stock is Falling with the CEO Buying Millions of Shares, Investors Should Follow
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing legend Peter Lynch has stated that there are many factors that result in insiders selling shares of a company stock, but only one for buying. Reasons to sell, according to Lynch, who guided the Fidelity Magellan mutual fund to annualized returns of 29.2% from 1977 to 1990, could include the need for cash to buy a home or pay tuition. The insider selling could also be part of a pre-planned diversification program for a personal financial portfolio. But, as Lynch advised, there is only one reason for insider buying: the expectation that the share price will rise higher.
Of all the corporate insiders, none know a company better than its chairman and chief executive officer. When the head executive buys, that is a very bullish sign for the future of a company. At present, the chief executive officers of both Dole Foods (NYSE: DOLE) and Opko Health (NYSE: OPK) are buying millions of shares in separate transactions when the sector each company operates in is currently in disfavor with investors and the share price is falling.
This summer has not been kind to stocks in the food sector. The rising price of oil has raised the cost of fertilizers,diesel fuel and gasoline, raising commodity costs. From that, margins are reduced. Tyson Foods (NYSE: TSN) is down 18.3% for the quarter. For 2012, Smithfield Foods (NYSE: SFD) has fallen by 21.3%. But contrast, rising for the last month of market action while other food stocks have fallen is Dole Foods, up by 43.4%.
A major reason for this is the insider buying by David Murdock, the chairman of Dole Foods. In less than a month, Murdock has bought over 2 million shares of Dole Foods on the open market. There have been no insider sales during this period. No other insiders have bought shares of Dole Foods in 2012. Murdock paid as high as $12.50 a share.
Dr. Phillip Frost, the chairman and CEO of Opko Health, is an investing legend. He has made billions, with his gains covered by financial publications such as Forbes and The Wall Street Journal, among many others. Due to health care reform, medical equipment companies such as Opko Health are ailing. Boston Scientific (NYSE: BSX), a major firm in the sector, has fallen 11.1% for the quarter. Net income is down for Boston Scientific, with its return-on-equity a negative 33.68%. As a result, Boston Scientific has been downgraded three times in the last year, the most recent on July 27, 2012.
Opko Health is off too, declining 9.4% for the last month of market action. Over the last four weeks, Frost has bought well over a million shares of Opko Health. In toto, Frost owns over 115 million shares of Opko Health. As there is a short float of 23.18% for Opko Health, he is definitely willing to put "his money where his mouth is" with his investing. So is Murdock, as there is a short float of 32.69% for Dole Foods. A short float of 5% is considered to be troubling for a company.
Both Frost and Murdock are essentially one-person short squeeze operations for each's company stock.
With insiders rushing to sell at company's such as Angie's List and Facebook when the law finally permitted, there is much to admire when an insider is willing to buy millions of shares of the stock when the sector is in disfavor and the stock has fallen. This is a demonstration of the confidence that the head executive has in the future of the company.
About insider buying such as this, writing in Forbes, Jim Oberweis, president of Oberweis Asset Management, stated that, "Management and Directors rarely back up such optimism by reaching into their own wallets and buying company stock. When they do, I pay attention. Officers and directors know virtually everything that can be known about their business. They see sales trends, know the development pipeline and are as likely as anyone to know what the competition is up to. Information access provides a big advantage in trading the stock. Insiders may sell shares for any number of reasons, but there is only one reason to buy. When I see an executive personally buying a big quantity of a stock that I already like, it raises my conviction to a buy as well. Academic evidence backs up my gut instinct. Better than 30 years of research shows that companies with significant purchases tend to outperform the market for the next 12 months after the purchase."
Making this "lead dog" guidance even more compelling is when investors can buy at a discount to what the chairman paid. This is currently the case with both Dole Foods and Opko Health. Down for the week and now trading around $12.39 a share, Dole Foods is below the $12.50 that Chairman David Murdock paid for 37,342 shares on Aug. 9. Now around $4.20, investors can buy Opko Health at about a 15% discount to the $5.05 that Dr. Phillip Frost paid for 168,989 shares on March 16. When the chairman is buying and investors can get in at a lower price, that is a time when it should pay to "follow the leader."
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article.