C-Suite Buy of the Week: Cautious Moves Signal Shift in Market Dynamics

Insider activity has pretty much ground to a halt. This is largely due to earnings season, which has slammingly closed the window of opportunity for insiders at most US-based corporations.

However, I would be remiss if I did not point out that insider buy-sell ratios began to turn bearish in mid-December and have steadily worsened. We also do not see much large-scale institutional buying at the moment. The clerks at the SEC who process 13D and 13G filings have temporarily replaced the Maytag repairman as the loneliest people on earth.

While insider ratios and the slowing pace of institutional activity do not necessarily signal impending doom, they tell us there is an air of caution and even uncertainty around the financial markets. Valuations are extremely high, and many measures of corporate values are approaching levels like, or even higher than, the nosebleed levels of early 2000.

We have a new administration whose policies on almost everything are completely different from those of the previous administration. Donald Trump has been in office for ten days now and has proven himself fairly unpredictable in his actions. Even harder to foresee is the financial market’s reaction to his policies and decisions. This combination of caution and uncertainty has insiders and fund managers standing on the sidelines for the moment.

Given the lack of new opportunities, I thought it might be interesting to fire up the Smart Money Wayback machine and look at some of the insider purchases made last year that have not worked out so far. We know that insiders buy stock in the open market because they believe the stock is undervalued relative to the value of the business and have solid reasons to believe it will move higher over time. We also know that insiders are usually patient and think big regarding the expectations for long-term gains. Insiders make open market purchases because they expect to earn multiples of their initial investment, not just percentage points.

Insiders at Liberty Latin America LILA were aggressive buyers of the stock last year, with some executives paying as much as $10 a share to position themselves for long-term profit windfalls. These windfalls have been slow to develop so far. That does not mean that the future does not still have the potential for massive gains.

Liberty Latin America primarily provides mobile, broadband, and fixed-line telecommunications services in the Caribbean and Central American regions. While the near-term picture is cloudy, the long-term outlook for Broadband and wireless in the region remains very positive.

Insiders remain positive, and we saw more buying by officers and directors in November and December at right around current prices. We will not have a clear picture of institutional activity until the SEC receives 13F filings next month. Still, it is worth noting that Berkshire Hathaway BRK and Gabelli Funds are two of the largest shareholders. Neither is known for having a short-term outlook, and both have delivered market-beating returns for their investors.

During the summer, we saw six different insiders at Cleveland Cliffs CLF make six- and seven-figure purchases of the stock. Clearly, they see a better future for the steel market than the financial markets see, as the price has fallen by about 35% since then.

Cleveland Cliffs has been moving to strengthen its position in the steel market and recently announced it was acquiring Canadian steelmaker Stelco Holdings Inc. for approximately $2.8 billion. Now that the Feds have killed the proposed deal for Nippon Steel to buy U.S. Steel, Cleveland Cliffs is back in the running to launch a buyout of that company.

The stock trades at less than 70% of book value and just $.25 on the sales dollar. Any good news will likely send the stock soaring back towards the 52-week highs. Goldman Sachs turned bullish on the stock last month and set a price target more than 5% higher than the current price.

The CEO, CFO, and a senior VP in charge of operations all purchased shares of Hillenbrand (HI) in May of last year at prices well above the current level. Hillenbrand exited the casket business back in 2023 and has focused on industrial process solutions and injection molding systems. Its systems are used to mix and shape materials and transport materials through the production process.

The company serves a wide range of industries, including auto manufacturers, chemical companies, the oil and gas industry, food companies, packaging companies, and recycling companies. Hillenbrand should reverse a year ago losses and show solid profits this year. It is not the most exciting business in the world. Still, generally speaking, when we see the CEO and CFO buying stocks, there are plans in the works that the two senior executives expect to drive the stock to several multiples of the current stock price.