Is it good when insiders Buy stock?

If the US slips into recession, insiders will be the bag holders. That’s one conclusion to take from the latest update from JPMorgan’s quant team, which suggests that but for record levels of corporate equity purchases in the year to date, the US market correction would have been much worse.

It finds that 2022 has already been the worst since ‘Nam . . . 

. . . . and fighting that trend, equity buybacks are likely to reach an unprecedented $600bn in the first half.

Share repos were running three-to four-times above the trend in recent weeks, JPMorgan says, and the internal plunge protection teams still have plenty of ammo left. Ex-financial S&P 500 companies are sitting on $1.9tn in cash, its screen shows — that’s some 219 US companies valued above $1bn with 25 per cent or more their market cap in cash.

But directors haven’t just been using shareholder money to buy the dip. Insider buy-to-sell ratios in sectors including tech and communications are running at their highest levels since 2012. There’s the marketwide view:

Without companies acting as buyers of last resort, investor positioning would look even more bearish than suggested by the S&P 500’s drop from peak levels, JPMorgan says. Its team advises to use average declines rather than capitalisation-weighted index levels for a clearer picture, as it takes better account of companies less able to use buybacks to cushion their fall:

“Anything short of a recession will probably catch most investors completely wrong footed, in our view, especially after broad and severe drawdowns that are 75 per cent of the way to prior recession bottoms,” writes the strategy team led by Dubravko Lakos-Bujas.

All of which shines the spotlight on the recession-tolerant US defensive sectors, which are trading at a near record premium versus cyclicals.

If the US somehow dodges recession, investors would be expected to rotate back out of this lopsidedly defensive position. And if recession does happen, “they will get annihilated anyhow under the last one standing doctrine used as a source of liquidity funding,” adds JPMorgan sales trader Jack Atherton. “You should start preparing for either scenario.”

Insider buying can be a good indicator of a company's growth prospects because insiders often have insight into material nonpublic information about their companies. Senior executives at Starbucks (SBUX), Coinbase (COIN), and TransDigm (TDG) have been purchasing shares of their own companies of late. So, we think it could be wise to add these stocks to one’s watchlist. Read on.

The major market indexes ended in the red yesterday, with the Dow Industrial Average falling 0.5%, while the S&P 500 and the Nasdaq Composite declined 0.7% each. Since the beginning of the year, the stock market has faced substantial selling pressure on investors' concerns about interest rate increases by the Federal Reserve to tame multi-decade high inflation, supply disruptions arising from the Russia-Ukraine war, rising energy and commodity prices, and the potential for a recession.

Given the volatile market backdrop, investors have been tracking insider stock purchases to identify fundamentally sound companies. An insider can be anyone employed by the company–typically an executive or a manager–who owns more than 10% of the company's voting shares. Due to their active involvement in the company's affairs, insiders usually have the most up-to-date information on a company and its outlook. Insider buying is often considered a reliable indicator of a company's performance because insiders often have intimate details of a company's operations, Capex plans, and order flows that could be unknown to analysts and investors. Thus, heavy insider buying could mean that the people who are part of the business are bullish on its prospects.

Senior executives of Starbucks Corporation (SBUX), Coinbase Global, Inc. (COIN), and TransDigm Group Incorporated (TDG) have been purchasing a significant number of shares of these companies recently, respectively. Thus, we think it could be wise to add these stocks to one's watchlist.

Starbucks Corporation (SBUX)

SBUX in Seattle, Wash., operates more than 33,000 stores as a premier roaster, marketer, and retailer of specialty coffee worldwide. The company operates in three segments: Americas, International, and Channel Development. It offers coffee and tea beverages, roasted whole bean and ground coffees, single-serve and ready-to-drink drinks, iced tea, and various food products. 

On May 24, 2022, SBUX announced that it had agreed to Bolthouse Farms acquisition of Evolution Fresh’s brand and business. This move should enable SBUX to focus on growing its core business while also improving its customer experience.

SBUX CEO Howard Schultz purchased SBUX shares worth $10 million on May 10. He bought another 72,500 shares on May 12 for an average price of $68.85 per share.

SBUX's consolidated net revenues increased 14.5% year-over-year to $7.63 billion for the second quarter, ended April 3, 2022. The company's net earnings rose 2.3% year-over-year to $674.50 million. Also, its EPS came in at $0.58, representing a 3.6% increase year-over-year.

Analysts expect SBUX's EPS for its fiscal 2023 to increase 20.2% year-over-year to $3.45. Its revenue for its fiscal 2022 is expected to grow 11% year-over-year to $32.25 billion. And over the past month, the stock has gained 2.2% in price to close the last trading session at $76.28.

SBUX's POWR Ratings reflect solid prospects. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting. It has a B grade for Quality.

It is ranked #24 of 44 stocks in the B-rated Restaurants industry. Click here to see the other ratings of SBUX for Growth, Value, Momentum, Stability, and Sentiment.

Coinbase Global, Inc. (COIN)

San Francisco’s COIN is a financial technology company that provides end-to-end economic infrastructure and technology. The company offers the primary financial account in the crypto economy for retailers, a marketplace with a pool of liquidity for transacting in crypto assets for institutions, and technology and services that enable ecosystem partners to build crypto-based applications and securely accept crypto-asset payments.

On May 13, 2022, COIN's director Frederick Ernest Ehrsam III, acquired 706,554 shares of the firm's stock for an average price of $70.77 per share.

For its fiscal first quarter ended March 31, 2022, COIN's net revenue declined 27% year-over-year to $1.16 billion. The company's monthly transacting users (MTU) increased 50.8% year-over-year to 9.20 million. Also, its assets on the platform increased 14.7% year-over-year to $256 billion. In addition, its adjusted EBITDA declined 98.2% year-over-year to $20 million.

For its fiscal 2023, COIN's EPS and revenue are expected to increase 48.7% and 26%, respectively, year-over-year to $3.83 and $5.71 billion. It surpassed consensus EPS estimates in three of the trailing four quarters. And over the past month, the stock has declined 39.1% in price to close the last trading session at $68.63.

TransDigm Group Incorporated (TDG)

TDG in Cleveland, Ohio, is a designer, producer, and supplier of engineered aircraft components for use on commercial and military aircraft in service. Its segments include Power & Control, Airframe, and Non-aviation. Its product offerings include mechanical/electro-mechanical actuators and controls, belts, and safety restraints for ground transportation applications.

On May 25, 2022, TDG announced the completion of the acquisition of DART Aerospace from Greenbriar Equity Group, L.P., for $360 million. The acquisition will increase TDG's revenues and give it exposure to the aftermarket.

On May 23, 2022, TDG director Robert Small purchased 47,851 shares of TDG.

TDG's net sales increased 11% year-over-year to $1.32 billion for its fiscal second quarter, ended April 2, 2022. The company's adjusted net income increased 50.3% year-over-year to $227 million. And its adjusted EPS came in at $3.86, representing a 49.6% increase year-over-year.

Analysts expect TDG's EPS for its fiscal 2022 to increase 34.3% year-over-year to $16.29. Its revenue for the quarter ending Sept. 30, 2022, is expected to increase 16.7% year-over-year to $1.49 billion. It surpassed the Street’s EPS estimates in three of the trailing four quarters. And over the past six months, the stock has gained 8.4% in price to close the last trading session at $600.09.

TDG's POWR Ratings reflect this promising outlook. It has a B grade for Quality.

It is ranked #37 of 77 stocks in the Air/Defense Services industry. Click here to see the other ratings of TDG for Growth, Value, Momentum, Stability, and Sentiment.

SBUX shares rose $0.35 (+0.46%) in premarket trading Thursday. Year-to-date, SBUX has declined -33.99%, versus a -13.50% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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