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With numerous retail stocks hitting multi-year lows and daily headlines about weak consumer spending, something is interesting is happening: The people who should know the most about these companies, the insiders, are buying their own stock at an unprecedented clip, reports Bloomberg.Executives at Limited Brands (NYSE: LTD) and Dillards (NYSE: DDS) have been scooping up their own beaten-down stock. Executives at Foot Locker (NYSE: FL) and Chico's (NYSE: CHS) have also been significant buyers.
Is this a bullish signal? Perhaps. After all, it's been said that while CEOs sell their shares for all kinds of reasons, they only buy stock for one reason: they think it's going up. That's a pretty good maxim, but it can lead you astray in some cases.
Executives at sputtering companies are keenly aware that their own trading will be carefully watched and can send a signal to the marketplace. At Sharper Image (NASDAQ: SHRP), the stock went up 45.5% in one day after six executives bought a total of $400 thousand worth of stock. As I wrote at the time:
They added about $13 million to the company's market cap -- an amazing return on a total of $400,000 worth of buys by insiders -- a "creation of value" equaling a return of about 3,200%. Warren Buffett, eat your heart out!Folks, here's the thing: Insider trading is illegal. If you think that this "vote of confidence" is indicative of anything material, then you just bought stock in a company where six executives, including the Chairman and the CEO, should be under SEC investigation.
And besides, who wouldn't buy stock when the act of buying would drive up the share price 45%?
Insider buying draws in investors which can often drive up the price of the stock.
Are retail stocks a good investment here? Perhaps. But if they are, it will be because they're undervalued -- not because insiders are buying.
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