Strong insider buying suggests a 15% rally in the S&P 500 from here

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One of the troubling things about this market downturn is that corporate insiders have never shown much interest in their discounted stocks.

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It has changed in a big way. They are now bullish – signals that the stock market is oversold and due for at least a short-term bounce if not higher. Using history as a guide, the S&P 500 SPX,
+0.49%,
Dow Jones Industrial Average DJIA,
+0.21%
and Nasdaq Composite Comp,
+0.83%
Stand to advance 15%-20% over the next three months.

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how do we know? I’ve watched the daily flow of insider buys to my stock letter (link in bio below) for over two decades, so I have a good sense of when volume is even more important. quality Insider buying has boomed.

“Quality” refers to buying by insiders with a strong record, buying by executives on forward directors of the business, and bullish formations such as cluster buys. All these signs have improved significantly.

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Insider services that track purchase intensity have noticed the same thing. “We’ve certainly looked at the ratio of insiders to sales,” says Mike Stein, research manager for The Washington Service. “They call down.”

“I think insiders are money smart. They understand companies,” says Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments.

Unlike me, Stein and Tangler are reluctant to say that’s down.

But the numbers certainly suggest it. Here’s data demonstrating the strength of the spike in insider buying, followed by three large-cap names insiders really like right now. It’s worth noting that the Washington service excludes 10% of owners — wealth managers who often lag behind in the market but have to report as “insiders” because of large positions — to focus on pure insiders. This means employees and directors.

First, the ratio of companies making insider buying to sales doubled to 0.95 . It is done (chart below). According to data provided by The Washington Service, this is a big deal as it is more than double the average of 0.47 since 2016. This ratio had crossed 1 during the pandemic panic in March 2020. It was close (0.94) in December 2018, which was the worst selling month of that year. Three months after that buy signal, the S&P 500 was up 16%.

Todd Lowenstein, an equity strategist at The Private Bank at Union Bank, isn’t surprised that a handful of insiders are buying. “There are some good values ​​emerging right now,” he says. “You can pick up quality business at a reasonable price.”

In dollar terms, the buy-sell ratio has tripled to 0.29. This compared to an average of 0.1 since 2016. This ratio also reached 0.29 at the sales climax of December 2018. Three months later, the Nasdaq was up more than 20%.

The ratio of the number of insiders buying versus selling has more than doubled to 1.08. This is a solid buy signal for me as the ratio has averaged 0.39 since 2016. The only time it pierced 1 since 2016 was during the pandemic panic in March 2020, when it rose to 2.2.

It’s the same story in Vickers Insider Weekly. According to a note published by Vickers Monday, “Corporate insiders have reacted with increasing optimism, expressing a belief that historically notable rallies have come before.”

Vickers’ one-week insider sell/buy ratio recently dropped to 0.91. (Lower means more optimism.) This marks “a very rare period with more inside buy transactions than sell transactions,” Vickers says. The last time this happened was in March 2020. Three months later the Dow Jones Industrial Average was up 35% and a year later it was up 70%. This ratio also fell below 1 in December 2018. The Dow then rose 14% in three months.

Finally, there has been a sharp decline in the sales of the big blocks. Doug Ramsey, chief investment officer at Leuthold Group, likes to measure insiders by measuring large transactions of 100,000 shares, or $1 million. He subtracts purchases from sales to find “net sales” as a percentage of issues traded on the NYSE. It fell below 1% on May 20, elevating the measure to “maximum bullishness”, he says.

Three stocks insiders love

There are literally dozens of attractive stocks to consider based on bullish insider buying. Here are three from the world of large caps.

home depot

insider buying: A director recently purchased $431,000 worth of stock at $288 per share.

shares of home depot hd,
+1.42%,
The world’s largest home improvement retailer is down more than 31% this year. It doesn’t really make sense because the performance is great, especially for a retailer. The first quarter results confirmed this.

“The company beat revenue. It beat earnings and it raised guidance. But they are still punished by the market,” says Tengler, who owns the retailer on behalf of his clients at Laffer Tangler Investments. “The first quarter is usually the slowest, and it was their highest quarterly sales ever.”

Morgan Stanley analyst Simeon Gutman believes the increase in guidance was conservative.

One fear is that the housing market slows down as home mortgages rise. But Tengler argues that it’s not really a negative, as people are more apt to improvise while they’re at home.

“Given the demand for home-improvement jobs and labor shortages, the backlog of projects should remain in place throughout 2022,” says Gutmann.

Home Depot has pricing power, as well in an inflationary era. We know this because the number of customer transactions declined 8% in the first quarter, while the average ticket increased 11.4% to $91.72. This helps support the company’s 15.5% operating margin, which is high for the sector, says Lowenstein. They also like the 2.7% dividend yield, and the fact that Home Depot can continue to boost the dividend because it generates so much free cash flow — $15 billion is expected this year.

JPMorgan analyst Christopher Horvers is somewhat overweight on the company because he thinks it is resistant to Amazon.com AMZN,
+2.39%,
With home improvement projects, people love to touch and see products before they buy them, and ask for advice. Morningstar Direct analyst Jaime Katz favored a coveted wide ditch rating on the name, citing Home Depot’s size and brand strength.

Morgan Stanley

insider buying: A director purchased $2 million worth of stock at $79.30.

As an investment bank, Morgan Stanley’s M.S.,
+0.01%
Performance is directly linked to the stock market and economy. This makes it a cyclical name with volatile results. Revenue declined 5.7% to $14.8 billion in the first quarter. The stock is down 25% since the beginning of this year.

Book under the hood, and you’ll find some business diversification that offsets cyclicity and volatility, opposes Sonny Lin, a senior portfolio manager at Wealth Enhancement Group, which has a position in this name. Last quarter, for example, market volatility helped build strong revenue gains in its trading arm, which offset weakness in investment banking and wealth management.

Tangler, which also owns the name Laffer Tangler Investments, says the wealth management business is attractive because of the relatively predictability of fee income. “It looks like an annuity,” she says.

This business also has a high profit margin, backed by an overall 20% return on tangible equity. Tangler also likes strong free cash flow, backing a 3.4% dividend yield.

coinbase

insider buying: A Director Recently Bought $75 Million Worth $63.92 to $72.85.

As crypto goes, so does Coinbase Coin,
+7.17%,
This is because the company is a US-based major cryptocurrency exchange. Bitcoin, Ethereum and other cryptocurrencies have fallen by 50% or more since November, with transaction fees reduced. First-quarter revenue fell 53.2% from the prior quarter to $1.16 billion.

On top of that operating costs increased sharply by 111%. This pushed net income into the deep red. The Upshot: Coinbase stock is down 83% since November and recently traded below $62. Down here, a director has said that $75 million is enough to purchase stock.

What’s the point in accelerating it? Bitcoin and other cryptocurrencies are here to stay, despite regulatory challenges. Morningstar Direct analyst Michael Miller says Coinbase has built a reputation and track record that supports its staying power and high transaction fees. He has a fair value estimate of $131 on the stock, and a potential four out of five star rating.

Unlike other platforms, Coinbase has multiple revenue streams. It acts as an asset custodian and broker, and it provides collateralized loans, a crypto debit card, blockchain infrastructure support, and data analytics. CEO Brian Armstrong says that expanding into new product lines will now be easier due to the crypto recession. “We see the down period as a huge opportunity because we are able to pivot to others to have great talent, get distracted, and let down. We try to do our best during the down period. Let’s try.”

JPMorgan analyst Kenneth Worthington maintains his “overweight” rating, citing Armstrong’s strategy to continue investing in the business, lowering his price target from $258 to $171, even as the tide has turned. . Worthington also likes the company’s strong…

Credit: www.marketwatch.com /

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