Insider stock buying surges

NEW YORK -- U.S. executives ranging from billionaire Warren Buffett to directors at teen clothing retailer Gadzooks are buying shares in their companies at the strongest pace in almost eight years, even as the stock markets reach new highs.

Company insiders -- executives, directors and big individual investors -- started snapping up shares when the stock market bottomed out in August and September. They've continued to buy at about the same level as the Dow Jones Industrial Average rebounded, gaining about 20 percent in six weeks.

"The pace of buying says the market still has a considerable amount to go," said David Coleman, a money manager at Insider Watershed Group, a Washington-based hedge fund that invests in stocks favored by inside purchasers. Coleman said he's been buying specialty retailers such as Gadzooks, where director Michael Machens bought 50,000 shares for more than $350,000 in mid-October, and vitamin seller General Nutrition, where seven executives bought $4.75 million in stock after a warning about price cuts sent its shares tumbling. Typically, insiders sell shares more than twice as often as they buy. In May, sales even outnumbered purchases by a 3-to-1 margin. Yet over the past eight weeks, insiders have been buying shares an average of almost twice as often as they've been selling, according to Richard Cuneo, editor of the Vickers Weekly Insider Report. That eight-week ratio of buyers to sellers has been at about its lowest level since January 1991 -- though the pace of selling has picked up some, he said. "Insiders -- amazingly so -- started buying about three months ago and sure enough the market has rallied to an all-time high," said George Shirk, managing editor of The Insiders newsletter in Deerfield Beach, Fla. "These guys are doing a very good job of buying their stocks when they're out of favor." There's been a marked increase of purchases made by "blue-chip insiders" -- executives at the Fortune 500 companies that were a key ingredient to the stock market's rebound, Cuneo said. Insiders at financial services companies such as American Express are at the top of the buying spree, taking advantage of an industrywide drop in prices. In early October, Buffett's Berkshire Hathaway paid $77.5 million for 1.08 million American Express shares, raising its stake for the first time since 1995. Those shares, purchased at an average $71.74, now trade at around $104. "There's only one reason executives buy their company's shares," said Shirk, who pointed to insider buying at oil and gas services, real estate investment trusts and gold and precious metals companies. "They think they're going to make money." Insurance companies, whose shares have been beaten down by weather-based claims and competition in commercial lines, are also proving attractive. Directors and executives at Chicago-based CNA Financial led insider buying in the last week of October, picking up about $18.4 million of the company's shares, according to Washington Service. Other industries leading the buying are medical supplies and health care, REITs and telecommunications, according to the Insiders' Chronicle newsletter by CDA/Investnet. Cuneo said he's been seeing strong insider support for U.S. Filter, CompUSA, Dayton Hudson, Baker Hughes and Tektronix. The pace of selling is starting to pick up, analysts said. That's especially the case at "high-flyers" such as Internet, biotechnology and computer software companies that have shown large stock gains, said analyst Frank Ponticello at Prudential Securities, who follows insider trading. In each of the past two weeks, insiders have been buying at the same rate as they've been selling, according to Vicker's Cuneo. Also, filings of Securities and Exchange Commission forms that reveal an insider is planning to sell shares in the future are expected to rise in November, analysts said. Coleman said he expects the ratio of sellers to buyers to fall back to its historical levels in coming months. Even so, he added, "Insiders are still buying at historically bullish levels." Ponticello said executives at small-capitalization companies -- whose shares are valued at $100 million to $1 billion -- are still buying at a strong pace, as well as those at commodity food companies such as Suiza Foods and Smithfield. "The small cap arena is still a place where there's room for more buying," he said.

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