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Playing Follow the Leader With Industry Insiders

October 19, 2007 – by Richard Band

Over the past several months, I have been telling my readers that the stock market would put on its grand finale for 2007 during the fourth quarter. Well, the time is here, ladies and gentlemen, now that Ben Bernanke has lit the fuse! We may hear a couple of empty hisses in early October as this company or that announces less-than-stellar third-quarter earnings. But mark my words, as the month wears on, it will become clear as day that the market wants to be unleashed and shoot higher. I’m fully invested and ready to take off…and so are the titans of Wall Street! 

While Ben Bernanke does his thing to rev up business activity (and indirectly, share prices), America’s corporate chieftains are already signaling that they think the September Fed rate cut will pay off. During the month of August alone, officers and directors of some of the nation’s publicly traded companies bought $465.5 million of their own stock—the highest monthly total since 1990.

Insider purchases don’t have to be large or flashy to be significant. In many cases, the mere fact that an insider is buying stock with his or her own money (rather than free stock via stock options) shows that the insider sees real value in the stock.

Historically, corporate insiders have shown an uncanny knack for scooping up their own stock near important market lows. When these guys swoop in, it’s usually a good idea for you and me to follow suit!

For instance, Time Warner Director Matthias Dopfner purchased 2,000 shares of Time Warner stock (NYSE: TWX) in early August at $18.94 a share. Now, that’s not a truck load of money, but it’s meaningful because Dopfner is the only insider at the media giant to have bought any shares on the open market in the past two years. I personally think it’s a good move. Times Warner is enjoying a robust earnings surge this year, and analysts expect profits for the next 12 months through December to jump 20% with another 15% increase on tap for 2008!

Buybacks: The Ultimate Insider Play

Except in rare cases, individual insider trades usually don’t affect the price of a company’s stock—the dollar amounts are simply too small to move the needle. But there’s one type of “insider” transaction that can make a huge impact on share price—and that’s when the company itself buys stock and retires it. As the supply of stock available for trading (the so-called “float”) shrinks, each surviving share becomes more valuable, other factors remaining equal. Think of a pie divided into fewer slices…everybody gets a bigger bite.

U.S. corporations have gone on a buyback rampage this year alone. According to Trim Tabs research service, the aggregate float for all listed companies shrank by $648.2 billion during the first eight months of 2007, a massive 53% increase over 2006.

On an annualized basis, float shrink through August equaled 4.0% of total market capitalization. That’s big stuff! At the current rate, it would take only 15 years for half the shares on the U.S. stock market to disappear entirely!

Many companies prefer to do large buybacks while paying a small cash dividend. Why? The reason is simple. A dividend that pleases shareholders has to be paid out every quarter, while management can start or stop buybacks whenever the time seems ripe.  This preference for buybacks is especially pronounced in the technology sector, where business conditions fluctuate widely.

Buying Opportunities Are Everywhere!

So who among the tech outfits is buying stock like crazy?

  • Well this tech industry giant has certainly made headlines with its $40 billion repurchasing program. If you don’t already own this stock, now is a great time to dive in with both hands! Earnings growth is already accelerating and should pick up further in 2008 as this company works out the kinks in its brand-new operating system.
  • This technology mega leader is making even more impressive strides. Since 2004, this maker of signaling processing chips that are now used in cell phones and digital TVs has retired an astounding 17% of its outstanding shares, even after allowing for new stock issued to employees through stock options. And this company is nearly debt-free. Best of all, earnings estimates for 2007 and 2008 are on the rise, and this stock is seriously cheap. Right now, it’s selling at nearly a 50% discount to its average price-earning ratio of the past five years.
  • Even big utilities are gobbling up their own stock! During August and September, two insiders bought up a total of $407,000 worth of stock, with the last purchase occurring at $41.79. This major utility, which serves the northern and western Chicago suburbs, is finally recovering from an accounting scandal back in 2002, which damaged the company’s reputation more than its bottom line. Debt levels are modest, and I’m looking for a resumption of annual dividend increases next year.

It’s time to celebrate the Bernanke boom by following in the footsteps of the nation’s corporate insiders. If they have enough confidence in the Fed’s recent action, then you should, too! Don’t miss the opportunity to fill your basket with the stocks insiders love!

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