By Michael Brush, MarketWatch
In his investing book “The Vital Few vs. the Trivial Many: Invest With the Insiders, Not the Masses,” George Muzea argues that the best time to purchase stocks is when “those in the know” are buying, and “those not in the know” are selling.
People in the know are corporate insiders like directors and top managers who get daily reports on sales trends and projections, and who can read the body language and other signals inside companies.
They’re buying like crazy in the coronavirus-led bear market, which has pushed down the S&P 500 Index by 12% Monday alone.
I’ve tracked insider buying on a daily basis for over 10 years, because it’s a big part of how I select names for my stock newsletter, “Brush Up on Stocks ,” launched in 2010. The current wave of insider buying is as big as any I’ve seen during the great panics of the bull market — all of which were followed by rebounds.
Importantly, insiders are going straight to all the sectors that will supposedly get hit hardest by the virus: air travel, amusement parks, restaurants and economically sensitive areas like basic materials, energy and industrials. They are doing so with repeated, large purchases. There’s virtually no insider buying in classic defensive areas like consumer staples.
Those not in the know, in Muzea’s view, are investors and the media. Given that studies routinely show the vast majority of mutual funds and hedge funds lag behind the markets, it’s easy enough to see why he might think investors aren’t in the know. They’ve certainly been big sellers lately, taking the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.54% , Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.42% and Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.71% down into bear territory.
I’ll have to claim conflict of interest on whether the media are “not in the know.” You can decide on your own if the wall-to-wall nonstop coverage of the coronavirus looks like the kind of groupthink that can cloud judgement.
One clue might be that it’s virtually all negative and often based on careless use of data. On his show “Tucker Carlson Tonight,” Carlson this week claimed the mortality rate for the virus is 2% to 3.4%. This is wrong because it’s based on a too low a case count. People who actually know about viruses, like virologist Michael Mina at Harvard University , believe the actual infection rate might be 10 times the commonly cited number, because of widespread under-reporting of mild cases.
That suggests the real mortality rate is 10 times less than what Carlson repeated, drawing from media reports that also constantly repeat the false mortality rate. But when you need ratings to support your show’s ad sales, damn the facts and scare the heck out of people, right? Sure, why not.
If you want to use Muzea’s advice — and follow insiders into names getting crushed by investors and negative media sentiment — consider the following companies. In the viral spiral, they’ve seen insider purchases of $1 million or more. This is rare in insider analysis, and it suggests potential outperformance.
Six Flags Entertainment
As the self-proclaimed largest regional theme park operator in the world and the largest water-park operator in North America, Six Flags Entertainment’s /zigman2/quotes/208050417/composite SIX -2.81% sales and profits are destined to get ravaged since people will shun amusement parks to avoid the coronavirus. So goes the conventional wisdom.
Insiders beg to differ, and they aren’t messing around. Director Arik Ruchim has booked over $63 million in stock purchases during the coronavirus meltdown of the markets and Six Flags shares. To be fair, that’s not actually his money. Rather, it represents buying by his investment shop H Partners. I discount a lot of supposed insider buys by “beneficial owners.” These are investors who have to report because they have big positions. But not when the purchase size is really huge and there’s a director involved. As the fourth-largest holder of Six Flags at the end of last year with a $180 million position, H Partners presumably knows this business well. So does Ruchim, as a director.
He’s not the only insider buyer. CEO Mike Spanos and director Selim Bassoul have purchased $500,000 each during the corona meltdown. Bassoul is the former CEO of Middleby /zigman2/quotes/201397614/composite MIDD +1.09% , which sells appliances and equipment used in industry, so he’s got good experience assessing economic trends.