Already, the financials headlines are comparing the August stock market declines to the selloff that took place in 2008. While the volatility may be similar, this selloff is clearly not based on the same fundamentals. In 2008, credit was nonexistent, major banks were grossly over leveraged and housing prices were about 25% higher than they are today. Today, the U.S. is not in a credit crisis, bank leverage ratios have come down meaningfully, consumers have a little less debt and credit is available, although some would say at very restricted levels. Europe's credit issues are not insignificant, but European debt is not as widely held as U.S. debt.
The economy may be slowing, and a healthy correction may be just what the market needed. In the meantime, while the world seems to be selling in panic, insiders are stepping up and buying at levels not seen since 2009. Insiders seem to be buying behind the major, fundamental difference between now and 2008: corporate profitability. In 2008, profits were nonexistent; today they continue to appear resilient.
Across the board, various businesses from Cisco Systems (CSCO) to Polo Ralph Lauren (RL) to Advance Auto Parts (AAP) have all reported better-than-expected profits, but more important, they have maintained or increased their sales and earnings guidance for the rest of 2011. Overall, earnings per share (EPS) has grown 17% year over year for S&P 500 companies reporting as of the middle of July.
According to data compiled by Bloomberg, 66 insiders at 50 companies bought shares over the past five days as the markets plunged. Since August 1, more than 900 insiders have purchased shares. This is the greatest level of insider buying since the five days that ended on March 9, 2009 when the S&P 500 hit a 12-year low.
Morgan Stanley (MS) CEO James Gorman bought 100,000 shares last week -- his first purchase ever since joining the company in 2006. He paid around $20 a share; today MS shares are trading around $17. Morgan Stanley's CFO also bought shares.
Shares of MEMC Electronic Materials (WFR), a maker of silicon wafers for the semiconductor industry, have dropped to $6 from $15. The stock now trades at less than 6x forward earnings and 58% of book value. Last week, insiders, including the CEO, bought more than 450,000 shares and paid just under $6 a share; the stock now trades around $6.35 per share.
The biggest purchase in dollar terms was a $2.5 million insider purchase of the amusement park operator Six Flags Entertainment (SIX), which is currently trading at $31 a share off from its 52 week high of $40.
One stock I would keep an eye on is the spirits company Central European Distribution Corp. (CEDC), a supplier of vodka and other liquors in Poland, Russia and neighboring countries. Shares have been pummeled over the past several months and now trade at levels lower than their 2008 price. At just over $5, shares are off from nearly $30 a year ago. CEDC is increasing its market share, but profits have been crushed due to rising costs and a weaker dollar. In addition, the company has more than $1 billion of debt vs. a market cap of $400 million.
CEDC's management has reduced guidance several times and now expects full year EPS of $0.80 a share or 7x earnings. Even if that guidance again proves optimistic, shares appear to have priced in further bad news. I've yet to see any sign of insider buying, but if that starts to happen, then CEDC could be a multi-bagger. In 2008 and 2009, its EPS was $2.93 and $2.25, respectively. If management can, once again, resurrect the company, shares should surge. Right now, however, CEDC is a highly levered company operating in Europe -- two characteristics that no one wants in a company.
Insiders are not market timers, even though we would like to believe that. No one knows when the market will change its mood and begin to focus again on intrinsic value. But, it's encouraging to see insiders buying when prices are falling.