The market continues to confuse a lot of people, including yours truly. The market is clearly richly valued at more than 20x trailing earnings, and earnings that have declined five quarters is a row.
I know the jobs report has everybody excited about the potential for economic growth, but those of us who actually read the report find that while it's better than it has been, it's not great. The number of people unemployed remains about the same as a year ago, as does the number of discouraged workers. It was a decent report and the real bright spot was the fact that business and professional services had a big jump, and those jobs tend to pay much better than the leisure, food and retail jobs that have been the biggest drivers of growth. Still, it is better but not great.
I have had a bit of a buyers' strike going on outside the banking industry. I am still finding a bunch of little banks to buy, but with the exception of a few special situations and REITs I just don't see much that is cheap. I am not selling anything as the valuations of my cheap stock portfolio have not pushed to the point where I think they need to be sold, but I'm also not finding any new opportunities in the current market.
I continue to think that the market is very vulnerable to a downside move in the near future in light of the current goofiness surrounding the election and the tense geopolitical situation around the globe. However, I am often wrong about these things, so I decided to see what the people that actually run the world have been doing.
I already noted that most private equity managers are selling more than they are buying, and this morning I looked to see what the people who actually run the companies that make up the market have been doing in recent months.
I looked at insider cluster buying and selling activity over the last 90 days. I did find 19 companies where three or more insiders made large purchases of their stock. However, that number was dwarfed by the companies where three or more executives made large open market sales of shares of the companies they run. With a market that looks dangerously expensive and vulnerable, we might want to avoid stocks where the executives and directors think it is a good time to book some gains.
Constellation Brands (STZ) is a great example of a company where it might make sense to wait a bit before buying. I know Jim Cramer loves the stock, but even he said it might be best to wait for a pullback. Seven insiders have combined to sell more than $18 million in STZ stock in the last three months, with the last round of selling taking place last week. Constellation is a great company and I am certain that both my beer fridge and wine cabinet hold some of its brands, but at 31x earnings the stock is rich here. The insiders certainly seem to think so as well.
We also are seeing some cluster selling at what I think is one of the best-run companies in the world. Costco (COST) , which is part of Jim Cramer's Action Alerts PLUS portfolio, is a wonderful company and its executives have done a tremendous job of executing their growth plans over the years. This company is one of the biggest mistakes I made during the credit crisis as I looked at it closely and passed because I saw bigger opportunities in banks and real estate. The banks and real estate worked out OK for me, but Costco has been a monster stocks over the past seven years. Insiders seem to think the stock is rich at current levels, as four of them including the CFO have combined to sell $6.3 million of stock recently.
JB Hunt (JBHT) has benefited from a slow improvement in the economy and lower fuel costs, and the stock has quadrupled during the current bull market. There are some signs that growth is slowing, and the company just posted its first negative earnings surprise after several quarter s in a row of earnings beats. Insiders appears to be a little concerned about the immediate prospects for the company as five of them, including the chairman, have combined to sell more than $8 million of stock in the past two weeks.
Companies that see insider cluster selling have shown a tendency to underperform the market, and common sense suggests that we probably don't want to buy shares of a company when the people that run it are selling their shares. Even the very best of companies can trade at too rich a valuation, and insiders are telling us that is the case at these three companies right now.