February 16, 2010 / 7:08 PM / 9 years ago

CORRECTED - Small-cap execs buying own shares in bet on rebound

(Corrects date to Feb. 9 in second paragraph)

By Edward Krudy

NEW YORK, Feb 16 (Reuters) - Corporate managers at small cap U.S. companies are buying their own stock at a pace not seen in a year, a sign they see the recent pullback in equities as an opportunity.

Data compiled by Insiderscore.com showed insider buying at companies in the small-cap Russell 2000 index was at its strongest in the seven-day period ended Feb. 9 since the end of March 2009, shortly after markets hit a 12-year low, though it is still historically low.

Corporate executives sold stock for much of last year as the S&P 500 index .SPX rallied more than 67 percent from its lows.

But now, with the Russell 2000 having fallen almost 10 percent in three weeks since hitting a 15-month closing high on Jan. 19. insiders at smaller companies are scooping up shares.

Some analysts say trading by insiders at small and mid cap stocks can be a leading indicator for the wider market. Executives at those companies have more incentive to buy than big shots at larger companies.

“More often than not (insider trading at) small cap stocks tend to precede large caps,” said Kevin Leng, head of research at InsiderCow, which tracks insider trading. “If you are a VP at a small cap company you make decent money but no way comparable to a large cap executive.”

Generous stock option schemes for large cap executives makes accumulating stock in the open market less appealing, Leng said.

“If you’re the CEO of GE (GE.N) versus the CEO of a small cap bio company your incentive to buy your own stock is probably very different,” he said.

Buying in Russell 2000 companies is outstripping selling for only the third time since the end of the second quarter of last year.

According to Insiderscore.com there has been wide-ranging buying across small cap sectors. The financial sector has led the way but there has also been buying in other sectors such as biotech and energy.

To be sure, executives buy shares at times without regard to the movement in the stock, and data on buybacks in the last decade shows executives often purchase at the wrong time, buying when stocks are near a peak.

Insiderscore.com’s data is based on open market buy and sell transactions and cuts out other transactions, such as those resulting from preferred stock, which can muddy the data.

Over the last four weeks, there has been a 35 percent increase in the number of small cap companies with insider buying and a 19 percent increase among mid caps, according to data from Form4Oracle, which also tracks insider trading.

During the same period the number of large cap companies experiencing insider buying fell 3 percent.

The S&P 500 has lost more than 8 percent in three weeks since hitting a 15-month closing high on Jan. 19,

Despite the uptick in the small cap space, insider buying remains low on a historical basis. Corporate insiders bought $1.6 billion of their stock in the 60 days from the end of the first week of February, down 50 percent from $3.2 billion in the same period a year ago, according to data from TrimTabs

Insider buying has been below $1 billion for 10 consecutive months, according to Trimtabs, while insider selling has been elevated, peaking last year at around $7 billion in August.

Insiders “tend to be sensitive to fluctuations,” said Alex Romayev, owner & co-founder of Form4Oracle. “But this is still a small spike compared to the long-term trend.” (Editing by Leslie Adler)

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