thestreet.com article today on importance of insider buying
[I personally like Bernard's purchases of G* but hey I'm easily impressed :-) More interesting, Bernard buys G* and not LOR. I guess he doesn't go for the 44% safer argument... djane]
Insider News You Can Use
By John Rubino
Special to TheStreet.com
7/9/99 9:57 AM ET
It's disturbing but true: No matter how much time you spend
researching a company, you'll always be a step or two
behind the people running it. While you dissect the 10-K,
they're test-marketing new products. While you watch the
talking heads on CNBC, they're cutting deals with Microsoft
(MSFT:Nasdaq) and America Online (AOL:NYSE).
There is, in short, no substitute for being there. Except
maybe this: If you track what a company's insiders (i.e., its
officers, directors and major investors) are doing with their
stock and interpret that information correctly, you're getting
the distilled essence of inside information.
From a legal standpoint, there are two kinds of insider
trading: the criminal kind, which is defined as acting on
"material, nonpublic" information before it's released, and the
legitimate kind, which is buying and selling based on a more
general sense of how things are going. Even the regulators
argue about which is which, but all you really have to know
is that the Securities and Exchange Commission requires
insiders to tell the world about their trading activity. A
growing number of Web sites, including Yahoo! Finance
and Individual Investor Online, offer the raw data for free.
Just type in a ticker symbol, then click "insiders," and up
comes a chronology of who did what at what price.
Analyzing these data can be tricky, however. A reasonable
amount of selling, for example, doesn't tell you much, since
insiders often have most of their net worth tied up in their
company's stock and quite rationally want to diversify. Bill
Gates has been selling Microsoft stock all along, without a
noticeable effect on its price. Michael Dell, head of Dell
Computer (DELL:Nasdaq), recently generated a modest
buzz by dumping 4 million shares -- until everyone
remembered that he owns 350 million shares. And even
when it seems like an executive is selling most of his stock,
it's a false alarm if his options package dwarfs his actual
stock holdings.
Buying is a better indicator, since if insiders already have
most of their net worth tied up in their firm's stock, then
wanting more is a sign they really like what they're seeing.
But here again, things aren't always what they seem. Some
companies require officers to convert part of their
compensation into stock, which results in big buys around
bonus time. And occasionally, Machiavellian insiders will sell
big, then turn around and buy smaller amounts to throw
analysts off the trail.
At successful companies, a huge amount of buying is forced
by the expiration of options, which become worthless if not
converted to stock. This often shows up as a large number of
buys at odd, very low prices, followed by sales at current
market prices. Insiders at Cisco (CSCO:Nasdaq), for
instance, recently exercised options to buy several hundred
thousand shares at 8 55/64, and then sold most of them for
around 100 a share, cashing out without changing their net
stock positions. This is an important point: If options are
exercised and the stock is then sold, that's neutral. But if
options are exercised without offsetting sales, that's the
same thing as insiders buying on the open market -- a
bullish sign.
Remember, insider trading is only predictive if it's
broad-based, steady and/or really big in relation to insiders'
current holdings. An example of how this can play out is
restaurant chain Dave & Busters (DAB:NYSE): When its
stock dropped late last year, an army of insiders started
buying and kept it up until the stock more than doubled (at
which point they started selling). And on the negative side,
massive insider selling at Waste Management
(WMI:NYSE) in May and June preceded this week's warning
by the company that second-quarter earnings would fall
short of analysts' estimates. (See Herb Greenberg's
Wednesday column for details.)
For probably the best analysis of current insider activity, see
Bob Gabele's TSC column, or his Insider Chronicle
newsletter, where he cooks each company's insider activity
down to one "insider index." And for a window on future
insider trades, TSC columnist Ben Holmes' IPO Pros site
tracks Form 144s, which insiders have to submit to the SEC
before selling.
Now let's bring this discussion into the present (giving me an
excuse for a follow-up column one of these days) by listing
some companies that have seen a lot of recent insider
buying: banana grower Chiquita Brands (CQB:NYSE),
where Chairman Carl Lindner has bought about $20 million of
stock in the past year through June 1; sporting-goods maker
Johnson Worldwide (JWAIA:Nasdaq), whose Chairman
Sam Johnson has bought about 250,000 shares, worth over
$3.5 million since last August; and pipeline operator
Virginia Gas (VGCO:Nasdaq), where nine insiders have
bought in over the past two years, all in chunks of 10,000
shares or less. (I own a little of this thinly traded stock. Its
growth strategy is in transition right now, so don't buy
without serious further research.)
Are these stocks guaranteed winners? That's the same as
asking if big, broad, one-sided insider trading is an infallible
indicator, and the answer is of course not. Insiders are
human, and often, despite their perspective, they're flat-out
wrong. Managers at SunAmerica sold huge amounts of
stock for less than 20, not long before the company was
bought out by AIG (AIG:NYSE) for about 85 a share. More
recently, several insiders at broadcast.com (BCST:Nasdaq)
bailed just before a merger with Yahoo! (YHOO:Nasdaq)
sent its price soaring.
So treat insider trading as one of those
other-things-being-equal aspects of security analysis, as in
other things being equal, it's better to go with the insider flow
than against it.
John Rubino, a former equity and bond analyst, writes a
column on mutual funds for POV and is a frequent
contributor to Individual Investor, Your Money and
Consumers Digest. His first book, Main Street, Not Wall
Street, was published by William Morrow in 1998. At time of
publication, he was long Virginia Gas. While Rubino cannot
provide investment advice or recommendations, he invites
your feedback at rubinoja@yahoo.com.
Send feedback to letters@thestreet.com.
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