To Our Business Partners

DÉJÀ VU

While we don’t spend a lot of time on big picture issues concerning the stock market, occasionally something catches our eye we think deserves attention.  Interestingly, we wrote about this same topic exactly three years ago.  We’re referring to the relationship between company share buybacks and “insider” stock transactions.  Companies, with board-of-director approval, often buy back shares of their own stock in the open market for various reasons.  Likewise, insiders – individual corporate officers and directors – often trade shares of the company they represent.  Senior management seemingly know more about their own company’s operations, so company and insider purchases and sales often send a strong message to the investment community.

Logically, one would think these two indicators would normally move in the same direction.  After all, the same corporate leaders are involved in both activities.  What gets our attention is when they move in opposite directions, which is what is happening now.

The announced sum of corporate share buyback programs has topped $1 trillion so far in 2024 and will likely eclipse the record set in 2022.  At the same time, the ratio of insider sales to insider purchases is also approaching new highs this year, approaching the record high achieved in late 2021.  In other words, corporations plan to BUY record amounts of stock, while the corporate executives individually are SELLING at a record pace.

There are many reasons for individuals to sell stock – tax planning, financing kids’ educations, paying debts, or raising liquidity for other needs.  There’s an inherent conflict when corporate insiders are involved in both their own and corporate transactions.  Quite often, management compensation is partially based on the stock price of their companies.  Buybacks reduce the number of shares outstanding, which increases the earnings per share of the company.  What better way is there to support the stock price than for the company to buy back shares to increase EPS growth, while at the same time selling their own personal holdings???

While corporate share buybacks are generally favorable, they only make economic sense when they are performed at a discount to the intrinsic value of the underlying business, NOT to artificially inflate reported earnings per share.  With today’s market averages reaching all-time highs, it is hard to argue that this condition can be met by many companies.  In addition, insider selling often coincides with stock market peaks.  Be careful!

PORTFOLIO VALUATION 

Stocks are still too expensive to buy at today’s prices. 

RECENT RESULTS

All the popular stock market indexes advanced in November.  Smaller company composites (up over 10%) did the best, as investors seem to believe that the recent election results will yield better results than very large companies (up 6-7%).  Year-to-date, large–cap indexes continue to lead, with the S&P 500 and the NASDAQ Composite both up about 28%, while the small/midcap indexes are up 18-20%.  Similarly, over the last 12 months, large cap indexes continue to dominate – up 34-36% — while the smaller company indexes are close behind with returns up 33–36%. All the indexes’ gains are well above average, coming off lows established a year ago.  Our group* of portfolio stocks compares favorably to the gains in the general marketplace. 

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.