Immelt’s GE Purchases Signal Sell as Insiders Buy

By Eric Martin and Michael Tsang

Nov. 17 (Bloomberg) -- General Electric Co. Chief Executive Officer Jeffrey Immelt and Citigroup Inc.‘s Vikram Pandit are back to buying their own companies’ shares. That means there may be more stock declines to come.

CEOs, directors and other senior officers at New York Stock Exchange-listed companies purchased $1.37 billion worth of equities in October, according to Bethesda, Maryland-based research firm Washington Service. They snapped them up as the Standard & Poor’s 500 Index fell 17 percent, the most since 1987.

Insider buying, a bullish signal for two decades, lost its prescience this year and now may be a harbinger of a retreat in shares because it signals overconfidence, according to Ben Silverman, director of research at InsiderScore.com, a stock tracking firm in Princeton, New Jersey. The last time officers bought as much was in March 2008, preceding a drop in the S&P 500 a month later, data compiled by Bloomberg show.

“Everyone’s drinking the Kool-Aid,” said Michael Levine, a money manager at New York-based OppenheimerFunds Inc., which oversees $160 billion. “These guys know their companies better than the market, so they think they’ll be right. But the economic slowdown has happened much more quickly and has been much deeper than people expected.”

Insiders stepped up purchases in the past four months, buying $57 worth of shares for every $100 sold in October, from a low of $21 bought in June. The last time the amount of buying increased as much was in March, when executives bought $62 of shares for every $100 they sold.

False Starts

Futures on the S&P 500 lost 0.6 percent today. The gauge gained 7.9 percent from the end of March to 1,426.63 on May 19, before giving up the entire advance the next month. The index has dropped 44 percent since reaching a record in October 2007 as signs of a recession increased and banks lost almost $1 trillion on mortgage-related investments.

Insiders scooped up $2.15 billion of stock in August 2007 as S&P 500 companies reported record quarterly profits. Executives at financial firms such as Wachovia Corp. Chairman Lanty Smith and Washington Mutual Inc. director Michael Murphy accounted for a third of purchases after industry profits reached an all-time high. The S&P 500 rose 6.2 percent from the end of the month until the start of the bear market in October.

“Recent history isn’t on their side,” said Silverman, whose firm tracks insider transactions for more than 325 institutional investors. “We saw in financials last year people fooled by their own imagination. Whether it was hubris or being too close, not being able to see the forest for the trees.”

Best Buy

The S&P 500 lost 6.2 percent last week, dragged down in part by a 14 percent plunge in Best Buy Co., the largest U.S. electronics retailer. The Richfield, Minnesota-based company said last week that profit and sales will fall more than analysts forecast. Founder Richard Schulze bought 1.76 million shares three weeks before the announcement. The purchases were his first in at least five years, according to data compiled by Bloomberg.

A phone message left for Best Buy spokeswoman Susan Busch wasn’t returned.

GE’s Immelt purchased 50,000 shares at prices from $16.41 to $16.45 on Nov. 13, the same day the stock dipped below $15 for the first time since 1996.

Immelt, who took over on Sept. 7, 2001, bought GE stock after the terrorist attacks in New York and Washington four days later. The 52-year-old executive works without a contract and has always exceeded a requirement that he hold shares valued at least six times his salary. With his most recent purchase, Immelt now owns more than 1.62 million GE shares, based on U.S. Securities and Exchange Commission filings.

Immelt’s Confidence

Immelt’s purchase “reflects his confidence in the company,” said Gary Sheffer, a spokesman for the Fairfield, Connecticut- based company.

Pandit, 51, bought 750,000 common shares on Nov. 13, paying an average of about $9.25 apiece, New York-based Citigroup said in a filing with the SEC. He also bought 100,000 preferred shares. In all, he spent about $8.4 million. Citigroup closed last week at $9.52.

“The purchases reflect the belief in the long-term strength and growth opportunities of the company,” said Citigroup spokesman Michael Hanretta.

Nine officers and two directors at Consolidated Edison Inc., including Chief Financial Officer Robert Hoglund, bought the stock at $42.79 on Oct. 3. One month later, the owner of New York City’s biggest utility said third-quarter profit fell 42 percent, more than analysts estimated, on higher operating costs and taxes. The stock dropped 9.2 percent since their purchases.

The Consolidated Edison executives weren’t available to comment, a spokesman for the New York-based company said.

Buy Signals

In the past, insider purchases were a reliable indicator for investors looking to buy. Between 1988 and 2007, executives at NYSE-listed companies were net buyers on eight occasions, monthly data compiled by Washington Service show. In every case, the S&P 500 rallied in the following 12 months, posting an average advance of 21 percent.

Penn Capital Management’s Eric Green still considers buying by company executives to be bullish, especially when U.S. stocks are trading at historic lows relative to profits.

The S&P 500 fetches 9.96 times next year’s estimated earnings from continuing operations, compared with the weekly average of 21.1 times historical operating profit over the past decade, according to data compiled by Bloomberg.

“It’s always bullish when the insiders are buying because they believe in the fundamentals of the company and think the valuations make no sense,” said Green, director of research at Penn Capital Management in Cherry Hill, New Jersey, which oversees $3 billion. “This market could go up very, very quickly, and if you’re not in it you’ll miss it.”

Worsening Fundamentals

So far, fundamentals such as earnings have dropped along with stocks. Profits at S&P 500 companies declined for five straight quarters, the most since 2001. One-third of companies, including Burbank, California-based Walt Disney Co. and Seattle- based Starbucks Corp., missed analysts’ estimates for third- quarter earnings -- the biggest shortfall since 1997, data compiled by Bloomberg show.

“If you’re a company insider, you may not fully appreciate the economic wreckage going on worldwide,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, who helps manage about $60 billion. “From the inside out, the company looks a lot more solid than from the outside in.”

To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net