Is General Electric (NYSE: GE ) headed higher or lower? That's the question we ask when we evaluate insider buying and selling. We ask because how executives spend their paychecks is often a reflection of what they think of their companies' prospects.
Of course, not all buys are equal. According to two decades worth of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence From Insider Trading, buying is most predictive when it (a) comes from the CEO or other top-level executive, and (b) it's performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.
How do GE's managers measure up against Seyhun's benchmarks over the past year? See for yourself:
||Bullish. Last sale at prices significantly higher than recent buy. More buying then selling.
||One of the world's oldest and largest conglomerates.
|CAPS Stars (out of 5)
|Percentage of Shares Owned by Insiders
|Net Buying (selling)*
|Last Buyer (% increase)
Michael Neal, vice chairman
20,553 shares at $16.23 apiece on Oct. 15, 2010
(Added to direct holdings by 2%).
|Last Seller (% decrease)
James Cash Jr., director
4,890 shares at $19.05 apiece on April 20, 2010
(Reduced direct holdings by 22%).
Philips Electronics (NYSE: PHG )
Siemens AG (NYSE: SI )
Walt Disney (NYSE: DIS )
Sources: Form 4 Oracle, Capital IQ, and Motley Fool CAPS. Data current as of Oct. 27. *Open market sales and purchases only.
What we're tracking here and why
Insider buying data can be confusing. Here, I'm concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times they're buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.
Those personal holdings matter the most -- they're the shares executives hold for investment, rather than compensation. Employee stock options are different; they're compensatory in the purest sense. I've stripped out options-related buying and selling from the calculations you see above.
The Foolish view: bullish
Insider buying at GE hasn't always been a great indicator. CEO Jeff Immelt was a huge buyer of shares in 2008, before the financial crisis allowed Warren Buffett to buy a sizable portion of the business on very favorable terms. The stock is down another 36% since. Some Fools believe that makes GE an enticing value play.
"I'm long and strong with you GE. ... Some people thought that when your dividend was cut in half that you were trouble. I'm not that Foolish, reinvest that $10 BILLION in annual cash flows, pay off the billions in debt," Foolish All-Star TSIF wrote in May.
It's a fair point. Not only does GE regularly earn at least 10% on its common equity, but it also produced more than $15 billion in free cash flow last year. And that's low compared to years past. Immelt and his team have proven effective at putting capital to work for shareholders.
They know it, too. Only one insider has sold over the past year -- board member James Cash Jr. -- and that was in April and at more than $19 a share. More recently, GE Vice Chairman Michael Neal purchased 20,553 shares at $16.23 each, a small premium to yesterday's close. In each case, management is signaling they believe the stock is worth more than it's trading for today. I think they're right.
Do you agree? Disagree? Log into Motley Fool CAPS today and tell us how you would rate GE. You can also add the stock to your watchlist.
And if you want me to take a Foolish peek at the insider action of your favorite stock, email me here or use the comments box below. I'll write this column as often as you, our readers, demand.