Insiders Buying Banks

Executives of bank stocks continue to step-up to the plate and buy their own stock in the open market. A compelling sign for bank investors.

Hands down I think the best indicator that a stock is undervalued is when insiders begin purchasing their own stock in the open market. Insider buys coupled with a stock trading at multi-year lows is even better. A grand slam is when an entire industry is getting hammered from negative macroeconomic conditions and insiders across many different companies are stepping up to the plate and swinging hard.

This is currently happening in the banking sector. For the past two weeks banks have been getting sold off from the potential risk of an industry wide bank run. Two major regional banks have already failed. First Republic Bank has been injected with $50 billion from the majors and appears to be on the verge of failing. Credit Suisse has gotten a $1 billion buyout offer from UBS. With a valuation close to $8 billion, a $1 billion “take under” offer would essentially wipe out the equity.

The banking sector is under distress and value investors who can stomach pain could do very well for themselves. My strategy is to buy a weighted basket of bank equites on down days (10-12 different names) and sell when there is positive news. I have done this twice already as highlighted in one of my most read articles from last week and plan to continue to play these banks for deep value mean reversion.

My strategy is to buy the banks that are trading near 52-week lows coupled with insider buying. When insiders step up to the plate it shows they have confidence in the business they are running. Insiders purchasing their own bank’s stock in the open market is almost near perfect insider information. A buy from insiders shows confidence in management’s view that there is nothing wrong with the bank they are running — a bank run isn’t happening within their corporate doors and profits will continue to be generated.

For the past few months I have been tracking insider buying on every security in public U.S. markets. Since tracking these transactions there has not been an over-concentration into any single industry. That is until the past week. Ever since bank stocks have crashed, insiders at banks have stepped up to the plate — aggressively purchasing their own stock in the open market. It has been incredible to see and I think it is an indication that bank stocks are undervalued and the market is likely overreacting to bank runs and outright failures.

My strategy to play undervalued bank stocks is to buy the ones that insiders are purchasing. I want to own a core basket of bank stocks that continues to get bought by insiders. My goal is to identify the cheap ones that are trading meaningfully below tangible book value, pay a strong dividend and are well capitalized. Wall Street is pricing every financial like they could go bankrupt. This won’t happen. Wall Street tends to get overly pessimistic in bad times and overly optimistic in good times. Right now people are fearful on bank stocks. It is the perfect time to get greedy.

Here is the list of the biggest insider buys on bank stocks you probably never heard of. Have fun!