Barron's, Naureen S. Malik, 12 January 2006
Financial stocks have rebounded since hitting lows last spring and outperformed the broader market. But while investors buy into the frenzy, insiders sell, sell, sell.
Executives and directors sold nearly $1.7 billion in stocks in the fourth quarter of 2005 across the financial sector, particularly in niche firms, compared with $76.9 million in purchases, according to data from Thomson Financial.
On average, financial insiders sold $22.07 in stock for every dollar in purchases. Most of the sales took place in November and December due to earnings-related blackout periods in October.
"They are taking advantage of a great market [and] insiders are always opportunistic [to] take profits off the table," says Mark LoPresti, senior quantitative analyst at Thomson Financial. He notes financial stocks in general have outperformed the S&P 500 index by about 6% since touching lows in April.
Given the upward momentum behind financial stocks, a fresh round of option grants and year-end tax planning, "insiders would be induced to sell regardless of what the company was going to do going forward," he adds.
The outlook for the financial sector continues to be strong as concerns over an inverted yield curve ease. Consumer activity could pick up as rate hikes taper off.
Over the past 90 days, insiders at investment-banking and brokerage firms were the heaviest sellers, where 14 insiders at five firms pocketed $93.8 million, according to Thomson Financial.
"It's been a great year for the investment-banking and brokerage sector," says LoPresti, noting that sector is up about 35% since the lows of May 2005.
Three insiders at Bear Stearns led the activity in the investment-banking and brokerage industry by selling $78 million in stock, Thomson Financial numbers show. Chief Executive James Cayne was the top seller, shedding 202,000 shares in late December.
Six insiders at Lehman Brothers banked $34.4 million in the past three months. Notable selling also recently emerged in the last 30 days at Raymond James Financial, where five insiders sold $6.2 million in stocks.
Thomson Financial data indicate pervasive selling also took place in specialized finance (where insiders sold $31.4 million in stocks), diverse financial services ($30.7 million) and asset management ($23.7 million).
Sixteen insiders stepped up selling at five specialized-finance firms. The most notable among them are the 11 insiders at the Chicago Mercantile Exchange who made $23 million from the high-flying shares, continuing a selling spree from the previous three months.
Meanwhile, insider sentiment apparently reversed at consumer-finance company Capital One Financial. Nine executives and directors sold $16.3 million in shares in the past 90 days.
Using insiders' sales as a signal to dump shares can be tricky because "you don't get that many buy signals back," says LoPresti.
Instead, Michael Painchaud, managing director of research at Seattle-based Market Profile Theorems, posits that investors should avoid adding financial stocks to their portfolio with persistently low insider model scores (which indicate a higher level of selling and less buying), such as Bank of New York, Wachovia and Wells Fargo.
While selling tends to be the norm in areas such as the technology sector, financial insiders tend to be buyers.
As a result, "purchases in finance in the past have contained less information in terms of predicting future price movements than have [stock] sales," says Painchaud.
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Financial stocks have rebounded since hitting lows last spring and outperformed the broader market. But while investors buy into the frenzy, insiders sell, sell, sell.
Executives and directors sold nearly $1.7 billion in stocks in the fourth quarter of 2005 across the financial sector, particularly in niche firms, compared with $76.9 million in purchases, according to data from Thomson Financial.
On average, financial insiders sold $22.07 in stock for every dollar in purchases. Most of the sales took place in November and December due to earnings-related blackout periods in October.
"They are taking advantage of a great market [and] insiders are always opportunistic [to] take profits off the table," says Mark LoPresti, senior quantitative analyst at Thomson Financial. He notes financial stocks in general have outperformed the S&P 500 index by about 6% since touching lows in April.
Given the upward momentum behind financial stocks, a fresh round of option grants and year-end tax planning, "insiders would be induced to sell regardless of what the company was going to do going forward," he adds.
The outlook for the financial sector continues to be strong as concerns over an inverted yield curve ease. Consumer activity could pick up as rate hikes taper off.
Over the past 90 days, insiders at investment-banking and brokerage firms were the heaviest sellers, where 14 insiders at five firms pocketed $93.8 million, according to Thomson Financial.
"It's been a great year for the investment-banking and brokerage sector," says LoPresti, noting that sector is up about 35% since the lows of May 2005.
Three insiders at Bear Stearns led the activity in the investment-banking and brokerage industry by selling $78 million in stock, Thomson Financial numbers show. Chief Executive James Cayne was the top seller, shedding 202,000 shares in late December.
Six insiders at Lehman Brothers banked $34.4 million in the past three months. Notable selling also recently emerged in the last 30 days at Raymond James Financial, where five insiders sold $6.2 million in stocks.
Thomson Financial data indicate pervasive selling also took place in specialized finance (where insiders sold $31.4 million in stocks), diverse financial services ($30.7 million) and asset management ($23.7 million).
Sixteen insiders stepped up selling at five specialized-finance firms. The most notable among them are the 11 insiders at the Chicago Mercantile Exchange who made $23 million from the high-flying shares, continuing a selling spree from the previous three months.
Meanwhile, insider sentiment apparently reversed at consumer-finance company Capital One Financial. Nine executives and directors sold $16.3 million in shares in the past 90 days.
Using insiders' sales as a signal to dump shares can be tricky because "you don't get that many buy signals back," says LoPresti.
Instead, Michael Painchaud, managing director of research at Seattle-based Market Profile Theorems, posits that investors should avoid adding financial stocks to their portfolio with persistently low insider model scores (which indicate a higher level of selling and less buying), such as Bank of New York, Wachovia and Wells Fargo.
While selling tends to be the norm in areas such as the technology sector, financial insiders tend to be buyers.
As a result, "purchases in finance in the past have contained less information in terms of predicting future price movements than have [stock] sales," says Painchaud.
