In Building, the Insiders Are Getting Out

Much of the "blood in the streets" -- the indicators bulls are using to suggest the stock market is offering a great buying opportunity -- has flowed out of the driveways of depreciating and foreclosed American homes.

Shares of major homebuilders like Toll Brothers (TOL - commentary - Cramer's Take), NVR (NVR - commentary - Cramer's Take) and Centex (CTX - commentary - Cramer's Take) all started heading down in the first half of 2007. Toll Brothers and NVR both gave up about 60% of their market cap in the months leading up to last month's selling crescendo, while Centex cratered 90%.

But that's old news. More interesting is that over the past four weeks, all three of these stocks (along with most of their peers) have soared as investors bet that the worst was over for the building sector. Some fortunate punters have managed quick gains of 50% or more on the bounce. But the question remains: is this the start of a sustainable leg up for stocks in this sector, or just a bear-market rally?

Insiders seem to believe the latter. A lack of buying by insiders would be telling enough of their medium-term sentiment, but insiders in the group are actually still selling. They sold shares all the way down, and they are definitely selling the recent rebound.

Two board members at Toll Brothers cashed out nearly $3.7 million of profits by flipping large blocks of options on Dec. 17. Both these insiders had exercised options earlier this year when the stock was higher and, indicating some optimism, decided not to sell them all. Not this time. And after taking a sabbatical from his heavy selling last year, board member Bruce Toll decided the bounce offered a good opportunity to make his only sales of this year; he unloaded another 10.9% of his large stake.

There was much excitement in November 2007 when NVR Chairman Dwight Schar made a $52.4 million purchase. He increased his holdings by nearly 50%, buying 118,708 shares of NVR at an average price of $441.62. That bullish trade spurred the first round of "the builders have bottomed" pronouncements. Schar seemed prescient: As soon as the short swing restrictions expired six months after that purchase, he was able to sell the shares for around 30% more than what he bought them for.

Good thing that Schar thought short term. NVR fell to $350 last month and has only since rebounded up to where Mr. Schar bought over a year ago. He hasn't seen fit to try his luck again this year, although two other insiders have trickled in some money recently. Nonetheless, those minor insider buys are overshadowed by continued, large-options-related and open-market selling by other insiders at NVR all through 2008.

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At the time of publication, Moreland had no positions in the stocks mentioned, although holdings can change at any time. Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback; click here to send him an email.