Insider Sell-Buy Ratio: Swung to Bearish
That doesn’t mean there is nothing to trade.
Company officers and directors play with real money. They only get to keep winnings on shares they hold for more than six months (shorter-term profits must be disgourged). Trading signals from ‘money on the line’ tend to be much more reliable than sentiment indicators from the AAII (American Association of Individual Investors) or the oxymoronic Investor Intelligence surveys.
The correlation of the Thomson-Reuters Insider Sell-Buy signal has been a pretty good short-term (weeks to months) predictor of broad market action, especially when registering bullish readings. Bearish signals have not been as predictive as positive ones. They often turn out to have been false negatives.
That could have been simply a side effect of the almost non-stop bull market we’ve experienced since the latter part of 2012.
Today’s negative reading doesn’t mean you can’t still pick up some selective bargains. It does sound a note that suggests against plowing into positions indiscriminately.
Insiders are known to be unafraid to buy when shares in their own companies go on sale. Perhaps this week’s buy list is telling us something about the prospects much maligned discount retailer Target (TGT) and shoe purveyor Designer Shoe Warehouse (DSW). They showed recent insider buys at prices of about $56.80 and $25.71 per share respectively.
I wrote about DSW right as the shares were being pummeled (If the shoe fits... ) and was able to buy shares cheaper than the insiders did while also selling some now laughably low strike price puts at $22.50 and $25.00 for big premiums.
DSW closed on Jun. 13, 2014, at $27.38 but still offers option writers very attractive premium on the January 2015, $25 puts. The June 13, 2014, put premium of $1.70 per share brings the potential purchase price down to $23.30, if exercised. That is 15-cents below the panic low set on May 28th.
If DSW simply remains above $25, put sellers will pocket 100% of any premium collected without needing to buy shares at all. In a worst-case scenario they will be forced to buy shares of a well-financed, profitable company at a lower entry point than has been seen since early in 2012.
Target has had some obvious problems, of the operational and data breach variety. Take emotion out of the equation, though, and it appears the negative headlines have already been factored in.
Research firm Morningstar rates TGT as a 4-star (out of 5) BUY. They see fair value as $65. Target’s recently increased dividend also provides a 3.63% current yield. Maybe those insiders are pretty savvy investors.
Selling Jan. 2016, puts on Target provide an even greater margin of safety that does outright share purchase. Last Friday afternoon you could get $5.60 for the $55 puts and/or $8.50 per share on the $60 strike. Break-even points ($49.60 & $51.50) on both options are well below any price that Target has actually changed hands for in more than two years.
Standard & Poors is also positive on Target's future. S&P also assigns TGT a 4-star BUY designation. They call fair value as almost $68 per share. The company's high yield, low volatility and insider buying are just added gravy.
Shake off your fears of a 10% - 20% market correction. Selling puts can provide profits if the underlying shares go up, remain unchanged or even if they drop moderately. Go with value stocks that also exhibit insider buying and you have a potent combination for success.
Disclosure: Long DSW Shares, Short DSW Options, Long TGT shares, Short TGT options.
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