Wednesday, April 26, 2023

Insiders Are Flooding Into This Corner of the Market Right Now

By Whitney Tilson (View Archive)

Over the past few days, I've shared one of my favorite indicators that a stock is headed higher, regardless of what the overall market is doing...

I'm talking about insider buying, or what I call following "whisper trades."

To recap, an "insider" is a senior officer or director of a publicly traded company (like a CEO or CFO), as well as any person or entity that beneficially owns more than 10% of a company's "voting shares" – like how Warren Buffett's Berkshire Hathaway (BRK-B) owns 23.5% of energy company Occidental Petroleum (OXY).

Whatever their role, they all share one thing in common: Insiders only buy their stock if they think it's going to rise.

Back in early 2020, at the depths of the COVID-19 pandemic, it felt like the world was going to end...

The benchmark S&P 500 Index crashed 34% in six weeks, its fastest decline ever.

Many individual stocks fared much worse... Electric car maker Tesla (TSLA) got cut in half. Airline stocks like United Airlines (UAL) and Delta Air Lines (DAL) crashed. Cruise operators Royal Caribbean (RCL) and Carnival (CCL) fell more than 70% apiece.

More professional and retail investors sold indiscriminately, rushing to the exits as if there were a fire in a crowded movie theater.

Meanwhile, insiders at copper giant Freeport-McMoRan (FCX) were doing the opposite, backing up the truck...

The company owns the Grasberg mine in Indonesia, one of the largest sources of gold and copper in the world – considered a "trophy asset."

As the shares got clobbered during the COVID-19 crash, longtime CEO Richard Adkerson bought $2.5 million of shares and president and longtime executive Kathleen Quirk scooped up another $852,000.

Their purchases nearly coincided with the bottom in the stock, which soared more than 400% over the next two years.

The Freeport example carries an important lesson...

Regardless of what else is going on in the markets... when insiders are buying shares hand over fist, it's worth paying attention. It's worth listening to what we call their "whispers."

When retail investors are running to the exits, but insiders are buying shares at "fire sale" prices, it is often the perfect contrarian indicator.

Put another way, if the public is selling but the insiders are buying, who would you trust more?

The Silicon Valley Bank ('SVB') collapse is another recent example worth studying...

Last month, the largest bank in Silicon Valley and the 16th-largest in the U.S. declared bankruptcy.

It was the biggest bank to fail since Washington Mutual was shuttered during the global financial crisis in 2008.

But as I told my readers, the average investor needs to understand is that this is nothing like 2008, when the combination of a massive housing bubble, on- and off-balance sheet leverage, and widespread fraud created the biggest financial bubble in history.

When it burst, it brought the world to its knees and required every existing – and many new – tools of the U.S. government to stabilize the situation.

Today, our banking system and economy are healthy. There is no reason why the idiosyncratic problems of a few stupid banks – most notably SVB and crypto bank Silvergate Capital (SI) – should create a systemic problem.

SVB had nearly half its assets in mortgage-backed securities, higher than nearly any other bank, which made it particularly vulnerable to rising interest rates.

And Bloomberg columnist Matt Levine explained what doomed Silvergate...

[Silvergate] lost most of its deposits because its depositors were mostly crypto firms and crypto collapsed. It couldn't hold its assets to maturity, because it had a sudden huge need for cash to pay out those depositors. So it had to sell the assets, so it lost money, which left it thinly capitalized, which led to more depositors leaving, which led to more asset sales, which ended Silvergate.

These two banks were extremely dumb...

But, to be clear, every bank is vulnerable in a panic since nearly all depositors have the right to withdraw all of their money at a moment's notice – yet banks lend and invest those deposits, which means they're not completely liquid.

Hence, the critical role of governments is to carefully regulate banks and step in early and forcefully when problems emerge.

As I concluded in my March 13 daily e-mail...

Depositors should rest easy. As for investors in Silvergate and SVB, they'll likely be wiped out, as they should be. But the entire banking sector is taking a hit... so I think it's time to start looking for babies thrown out with the bathwater.

Nevertheless, investors panicked and indiscriminately sold the stocks of smaller banks, sending the SPDR S&P Regional Banking Fund (KRE) down 34% in a month and 43% from its 52-week high.

But bank insiders shared my view and quickly got to work...

In the days following SVB's announcement, a legion of insiders at regional banks scattered across the country bought gobs of their own stock.

At San Antonio, Texas-based bank Cullen/Frost Bankers (CFR), director Chris Avery bought $540,000 worth of stock, while CEO Phillip Green – who has been with the company for more than four decades and knows the business inside and out – bought $1 million of shares.

Three hours east, directors at Houston-based Stellar Bancorp (STEL) bought a combined $1.3 million of their own stock.

In New Jersey, a pair of directors at Valley National Bancorp (VLY) – which operates in New Jersey and New York City – put more than $2.2 million of their own money into the stock.

And closer to the Silicon Valley fallout, three separate insiders at California community bank PacWest Bancorp (PACW) opportunistically bought up shares. Longtime chairman of the board of directors John Eggemeyer invested $383,000... Executive Vice President William Black bought $267,000... and President and CEO Paul Taylor purchased $506,000 of shares.

In fact, when I saw these "whispers" from banking insiders buying their stock, I sent a handful of my colleagues this text...

Every single one of the "whisper trades" I told them about in that message went up.

In fact, the biggest play, a bank called Metropolitan Bank (MCB), rose 50% over the eight days following that text.

Tomorrow at 1 p.m. Eastern time, I'm going to show you how to get into the next five 'whispers' I'm hearing about...

I'll send you an e-mail with all the details tomorrow, right at 1 p.m. There's nothing you need to do to receive this e-mail.

Just earmark 60 minutes or so to watch my presentation on how to take advantage of these "whisper trades."

The presentation will be posted to our website... and sent to you free of charge.

Best regards,

Whitney Tilson
April 26, 2023