Welcome to edition 517 of Insider Weekends. The S&P 500 declined more than 2% last week as investors digested first quarter earnings numbers, another 3 million U.S. workers filed for unemployment benefits, some small businesses permanently closed shop and JCPenny filed for bankruptcy. I was surprised and dismayed to hear that after 33 years in business and with 50 locations, San Francisco Bay Area based Specialty’s Cafe decided to close permanently on account of the COVID-19 crisis. This was a mainstay for lunch for many Bay Area employees and while it is a single data point, it paints a grim picture for a V shaped recovery and indicates that the current stimulus programs may not have been enough for some small businesses to survive this downturn. Companies like JCPenny were already well on their way to insolvency and this crisis simply accelerated the inevitable outcome for some leveraged businesses.
Jay Powell is right that a recovery from this crisis will depend a lot on the discovery of an effective vaccine and that a recovery could take until the end of 2021. I certainly hope that it does not take that long and looking at various past outbreaks like SARS, MERS, Ebola and even the 1994 Plague in India, while they were very scary as they were unfolding, for the most part the acute phase of the outbreaks only lasted a few months. I have not changed my mind that the risk continues to remain to the downside. That said, certain companies and industries have been so hard hit that it is difficult to ignore the bargains they represent if we can expect some return to normalcy in the next year or two. There are also companies that may benefit from the new normal as working remotely becomes more acceptable. I have also been adding to select existing positions and starting new positions while attempting to hedge some of my long exposure.
It is not surprising that insiders are doing the same and stepped up their purchases significantly last week by purchasing $305.64 million of stock compared to $50.88 million in the week prior. Selling also increased with insiders selling $2.89 billion of stock last week compared to $1.72 billion in the week prior. Most of the management insider buying appears to be concentrated in the financial sector as you can see from the sector heat map below.
Sell/Buy Ratio: The insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by total insider purchases that week. The adjusted ratio for last week dropped to 9.48. In other words, insiders sold more than 9 times as much stock as they purchased. The Sell/Buy ratio this week compares favorably with the prior week, when the ratio stood at 33.78.
Note: As mentioned in the first post in this series, certain industries have their preferred metrics such as same store sales for retailers, funds from operations (FFO) for REITs and revenue per available room (RevPAR) for hotels that provide a better basis for comparison than simple valuation metrics. However metrics like Price/Earnings, Price/Sales and Enterprise Value/EBITDA included below should provide a good starting point for analyzing the majority of stocks.