Don't Touch Your Portfolio Without Looking for These 2 Bullish Signs

David Sterman's picture

Thursday, June 14, 2012 - 8:30am

by David Sterman

Ever since its founding in 1875, Prudential Financial (NYSE: PRU) has witnessed all kinds of economic cycles. The financial services firm's shares have been punished whenever investors fret that a downturn in the economy will hurt, yet the company's executives know that Prudential's line of insurance products, annuities, investment management services often represent calm ports in a storm. Consider that Prudential has never earned less than $5 billion in free cash flow in each of the past five years, even as the global markets tumbled in 2008 and 2009.

So you can imagine management's distress in recent weeks as Prudential's stock got tossed off in the current market rout. Management met with analysts earlier this week and announced a bold move to calm the waters. With more than $14 billion in gross cash, Prudential will part with $1 billion in funds to start buying back shares.

That buyback helps in two ways. First, it helps investors to stop fearing that business is in trouble -- companies often pursue buybacks when business conditions are better than a flagging share price may indicate. Second, it helps reduce the share count. The current buyback will reduce the share count by around 4%, though if shares fall any further, that $1 billion will buy back even more shares.

In recent weeks, Juniper Networks (Nasdaq: JNPR), Rockwell Automation (NYSE: ROK), Monsanto (NYSE: MON) and Mastercard (NYSE: MA) have all announced fresh buyback programs of at least $1 billion.

It's unusual to see this much activity in the final month of a quarter. Most companies wait until the next earnings release date before announcing such plans. At this point, it's safe to assume we may be looking at a huge wave of buybacks when second-quarter earnings roll in a month from now.

And that's good news for investors.

Insiders are also buying

We've also seen a noticeable uptick in insider buying over the past month. Here again, such moves typically take place once earnings season is underway, as the blackout period for insider transactions is temporarily lifted. The insiders buying now are among the minority not currently subject to blackout restrictions.

 Consider this stat: last week, we saw 334 open market purchases against 362 open-market sales, according to The sells-to-buys ratio is typically 4-to-1 or 5-to-1 and is rarely close to parity as it is now.

The key takeaway: look for a huge surge of insider buying in July and August, assuming the market remains in a funk. If you own a stock that is being bolstered by insiders, then you should take comfort that these individuals are confident enough to make big bets on their own stock during the current shaky environment.
Companies with major recent insider buying include:

Hewlett-Packard (NYSE: HPQ). Insiders have snapped up an eye-popping $400 million worth of stock in the past month, with much of that buying coming from company director Ralph Whitworth. He runs the investment firm Relational Investors, and it's clear he obviously thinks this stock is quite undervalued.

Vocus (Nasdaq: VOCS). This firm, which offers a suite of products that helps clients use the Web more effectively as a marketing tool, has seen more than $2 million worth of buying recently. Shares got crushed in late February after the company spent $169 million to acquire iContact, which is a big player in e-mail marketing. Analysts thought Vocus overpaid for iContact, but insiders are now signaling that shares have been punished too much for that sin.

Tempur-Pedic (Nasdaq: TPX). This mattress maker has seen its stock get crushed from $88 to $24 in just two months. In response, management announced a $200 million stock buyback and company officers and directors have been buying shares on the open market. Most investors are steering clear anyway to see how the current mattress industry shakeout plays out, but value investors may start to give this stock a closer look: Shares now trade for less than 10 times sharply reduced 2012 profit forecasts.

Risks to Consider: Buybacks and insider buying are great value signals but won't always prevent these stocks from falling even further in a tough market. Of the two moves, studies have shown that buyback announcements tend to provide more near-term downside protection in slumping stock markets.

Action to Take --> Buybacks are especially intriguing in this market. Falling stock prices mean that share counts can be reduced at an even faster pace. You should examine each of the stocks in your portfolio and see if there's any news about a buyback or insider buying. That could be a positive sign that shares are at or near a level of support.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.