Corporate America is pumping $1 trillion into stock buybacks — but look at what insiders are doing

This year's record pace of stock buybacks may not be as bullish as it seems. A reality check is needed because the buyback data are telling an incredibly bullish story.

Let's start with the data. Total U.S. stock-buyback announcements for the first half of the year were just shy of $1 trillion — "off the charts," Jeffrey Rubin, president of Birinyi Associates, said in an email. Completed buybacks — not just authorized repurchases but ones that are actually executed — are also running at a record pace, according to Rubin.

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The bullish interpretation of this year's buyback activity is straightforward, Rubin says: "The economy is strong, interest rates are steady and relatively low, earnings are growing … Corporate America is confident in the prospects [for] their company[ies], and see value in their stock."

There are at least three flaws in this picture, however.

The first is that "buybacks have been very concentrated," according to Winston Chua, a liquidity analyst at EPFR, part of ISI Markets. He calculated that 45% of this year's buyback announcements came from the technology sector and an additional 23% from the financials sector — a total of 68% from just two sectors. Chua argued that this concentration is a "cautionary sign" because it means that "participation is narrowing."

The second flaw is that corporate America is a poor stock-market timer. Rob Arnott, founder of Research Affiliates, said in an email that when he analyzed the data several years ago, "buybacks were negatively correlated with subsequent returns." Recent data reinforces Arnott's conclusion: Over the past decade, according to my firm's calculations, the stock market's average subsequent 12-month return has been lower after calendar quarters in which buyback announcements were higher than the prior quarter's total — and vice versa.

The third flaw is that corporate insiders are not spending their own money on shares — which is the ultimate sign of confidence. Instead, they're exercising stock options. Arnott said he suspects that "buybacks tend to ramp up when management is redeeming stock options, arguably to help facilitate the redemptions." Far from meaning that corporate management is confident in their company's prospects, therefore, robust buyback activity might instead mean that management wants to sell shares it already owns.

Nejat Seyhun is a University of Michigan finance professor and a leading expert on the interpretation of insiders' buying and selling behavior. In an email, he said that the "finance literature says that if insiders buy around corporate stock repurchases, that is good news for the stock's price and it goes up even more. If insiders sell, then stock prices are flat."

Seyhun added that insiders have been "mildly pessimistic" in recent months. That in turn suggests there will only be a "muted [market] response" to the record level of recent buyback activity.

Well-matched stocks

That doesn't mean that individual stocks can't do well, however. Based on Seyhun's insight that stocks tend to do well when buybacks are matched by insider purchases, the following table includes stocks for which there has been both robust recent buyback activity and net insider buying. It includes only large-cap stocks (market cap above $20 billion); they are listed by descending market cap.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

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