Anyone mulling an allocation into financial stocks should consider the behavior of company insiders at banks and brokers this year.
While it's true that insider buying by corporate executives and directors is running at its lowest levels in years in almost every industry, according to Thomson Financial, the level of insider buying in the financial sector is downright pitiful.
Insider buying at banks, brokers and insurers is running roughly 50% below average this year, according to Thomson. Normally, insiders at financial firms purchase $45 million in stock a month in their own companies. But this summer, the average monthly insider purchases at all banks, brokers and insurers is below $20 million.
The lack of buying comes at a time when many financial stocks have been solid performers. The Philadelphia KBW Bank index gained about 5% from June through August. Meanwhile, the Amex Broker Dealer index rose 14% over that same period.
Market watchers like to keep tabs on insider buying because it's an indication of whether corporate executives are bullish on their own stock. It's a far more telling indicator than corporate insider selling since it requires a corporate executive to put his money where his mouth is.
"The lack of
insider buying really has been the headline the past few months,'' said Lon Gerber, Thomson's director of insider trading. ''It means executives don't see bargains out there. They are not stepping in right now.''
Gerber said trends in insider sentiment usually predict turns in the market about six months down the road. And that could be bad news for a major index such as the
, which is increasingly dominated by bank and financial stocks.
In fact, many insiders in the financial sector area are using the run-up in their shares as an opportunity to cash out. For instance,
Bank of America
and credit card lender
sold a combined $21 million in stock in the month of August alone.
Is anyone buying? Yes, and analysts say that given the overriding trend toward selling, that's a particularly bullish indicator for these specific stocks.
Leading the pack is
, a real estate investment trust where Chairman and CEO Chaim Katzman has snapped up $5 million shares of the company's stock this summer. Katzman has been buying Equity One shares even as the Florida-based REIT's stock has risen 6% this summer.
Other financial firms with significant insider buying this summer include Puerto Rico-based
, business development firm
American Capital Strategies
, credit card lender
( PVN) and regional bank
National Commerce Financial
Of particular interest is the insider buying at Providian, a credit card company that has been trying to revive its image after sparring with bank regulators a few years ago and seeing its stock plunge from $60 to $2 a share.
The San Francisco-based company, under pressure from regulators, is moving away from its roots as a credit card company for borrowers with poor credit histories. In August, Providian sold 435,000 so-called "subprime" credit card accounts with $859 million in outstanding balances to a joint venture involving
( MER) and
( CCRT). Providian is trying to attract a more middle-market clientele.
The insider doing most of the buying at Providian is Richard Field, a member of the San Francisco-based lender's board since May 2002. This summer Field has purchased $1.97 million worth of Providian shares, according to Thomson. Over that period, Providian's stock has risen 13% and now trades around $10.50 a share.
Field's bullishness on Providian contrasts with the selling he's been doing in shares of
, where he's a director. This summer Field has reaped proceeds of $129,000 from selling shares of the online mortgage firm.