Here come the insiders.
Because they see their own businesses daily, company executives are suggesting through their actions that fears about the hit to economic growth because of COVID-19 are overdone. They’ve stepped up buying their own companies’ shares, and in all the right sectors.
Of course, company insiders are not virologists. So we can’t interpret their buying as a statement that COVID-19 is less risky than many people fear.
But insiders know their businesses well, and they get live updates every day. Based on what they see compared to how far their stocks have fallen, they clearly think investors are over-exaggerating the economic impact of the virus.
We get confirmation of this from major companies with large operations in China. Both Starbucks SBUX, +5.04% and Apple AAPL, +9.31% have resumed operations in China. There’s no insider buying at those companies that’s been reported, but that’s a statement on the COVID-19 threat trendline.
And benchmark indexes jumped Monday, with a big push late in the day, suggesting a sentiment shift that was initially telegraphed by these insiders if you looked closely. The Dow Jones Industrial Average DJIA, +5.09% surged 5.1%, and the S%P 500 Index SPX, +4.60% rose 4.5%.
Meanwhile, sentiment has turned dark. Many of the sentiment indicators I regularly track for my stock letter, Brush Up on Stocks, have now turned bullish.
This means they are so negative, they’re positive, in the contrarian sense. The VIX VIX, +4.10%, aka the fear gauge, recently pierced 40, which is often a buy signal. Various put-call ratios have risen to levels showing panic and extreme alarm, also a positive signal in the contrarian sense.
This isn’t the absolutely most favorable sentiment read I have ever seen in steep selloffs. Nevertheless, this level of negativity among investors, combined with this amount of insider buying, is often a good buy signal. And that seems to be the case, now that the benchmark S&P 500 Index SPX, +4.60% has fallen more than 10% on coronavirus fears.
It’s particularly interesting that much of the insider buying is happening in sectors getting hit the hardest on coronavirus fears: Travel, amusement parks, and “reflation trade” areas such as energy, materials and industrials.
Those are travel-related and economically sensitive sectors, so they get hurt more on worries about the virus and an economic slowdown. But, likewise, they’ll rebound more than the market as economic worries ease. Insiders are now clearly betting that this will be the next dynamic to play out in the markets.
Here are many examples, from names I’ve suggested in my stock letter over the past months and years as medium-term holds, meaning two to three years or more.
In travel, there was just an enormous cluster buy at Six Flags Entertainment SIX, +0.00% in the $26.50 to $31 range, which is around 38% below where it traded at the start of the year, $45. There was another cluster buy at Cedar Fair FUN, -4.40% as low as $44 to $52 (down 20%). In airlines and air transport, a director bought a fairly large amount of stock at Delta Air Lines DAL, +2.23% at around $51 to $54 (down 13% from highs this year), and there was large buying at Allegiant Travel ALGT, +1.39% at $140 (down 22%). There was also buying at three hotel and hospitality real estate investment trusts I have suggested in my letter.
In “reflation trade” names, there’s been huge buying in energy, including a $12 million purchase by founder Richard Kinder at Kinder Morgan KMI, +5.58% as low as $18.90 (down 16% from highs this year), enormous buying at Energy Transfer ET, +6.77% at $10.64 (off 23%), very large purchases at Enterprise Products Partners EPD, +4.24% at around $24 (off 17%), and large purchases at several other energy companies I have suggested in my letter.
Also in the reflation-trade group, there was a broad cluster buy at Huntsman HUN, +1.90% at around $19 in chemicals (off 21%), and large buying at around $21 at Trinity Industries TRN, +3.19% (down 14.6%), which offers services to industry, energy and construction companies, among others.
Given the volume of insider buying that hit the Securities and Exchange Commission database Feb. 28, I expect the onslaught of insider buying to continue, reinforcing the strong buy signal from insiders.
COVID-19: Signs of hope
As for COVID-19, Dr. Michael Mina at Harvard University, a virologist and medical doctor, believes the U.S. may need to step up “social distancing” efforts like the curtailment of public events, school closings and quarantines, as the case count picks up. Those measures could take public alarm to a new high, which could hurt investor sentiment, triggering another round of selling.
And don’t expect a vaccine to save the day soon. Mina does not expect a vaccine before this time next year. Be careful about buying Gilead GILD, +8.71% now as a COVID-19 play. Any revenue it gets from its potential COVID-19 vaccine will not be material to the company, says Michael Yee, a biotech analyst at Jefferies.
The good news is that the current stated mortality rate of 2%-3% is inaccurate, and you should ignore it. That’s because while we know the death rate, the infection rate is much higher than the stated numbers. Mina thinks the actual mortality rate is more like 0.2% instead of 2% because of under-reported cases.
Anthony Fauci, the head of the National Institute of Allergy and Infectious Disease, just published a paper in the New England Journal of Medicine making a similar case.
A technical reading
Technicians including Baird’s chief investment strategist, Bruce Bittles, caution against jumping in too fast, too deep. Before buying, he’d like to see two back-to-back rallies in which upside volume exceeds downside volume by a ratio of 10-to-1 or more. He also notes that the TRIN Index, a good measure of extreme panic selling that marks a low, has not signaled it is time to buy. He wants to see a TRIN reading above 2. “We are not there yet,” he says.
The bottom line: While there are lots of things to worry about, my take is that it’s time to get more bullish. By purchasing large amounts of stock in sectors getting hit the hardest by coronavirus mania, company insiders are telling us that investors are overly concerned about the economic impact, and that the selling is overdone. We are not out of the woods yet, but insiders are telling us we are getting close.
One solution is to plan your entry in three or four swipes, to average in — beginning now.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested SIX, FUN, DAL, ALGT, KMI, ET, EPD, HUN and TRN in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School.