GETTING PERSONAL: Getting Inside Dirt On Inside Trades27 Feb 15:20
By Kaja Whitehouse A DOW JONES NEWSWIRES Column
NEW YORK (Dow Jones)--If you can't beat the big executives who might be
trading on inside information, you might as well track their moves.
That has been the growing sentiment among small investors in what appears to
be another side-effect of Enron Corp.'s (ENRNQ) collapse. Anger has been
brewing over seemingly prescient trades by top Enron executives who sold large
chunks of stock just before the energy trading company's collapse. And some
investors are taking actions to be better prepared if it happens again.
Calls from retail investors have increased at companies that track insider
information from people pursuing signs of further corporate downfalls. Enron
executives reportedly sold about $1 billion in company stock in the three years
leading up to the bankruptcy while encouraging employees to load up on company
stock in their retirement plans. And the Houston company isn't the only
example. Executives at Global Crossings Ltd. (GBLXQ), which filed for Chapter
11 bankruptcy protection in January, reportedly sold stock during a period when
federal agencies suspect the company inflated revenue numbers.
"I've never seen more interest" in insider trading information, said Lon
Gerber, research director at Thomson Financial/Lancer Analytics. "It's the
perfect storm" with Enron and Global Crossing woes hitting the news
simultaneously, he said.
But investors keeping close tabs on executive trades might be disappointed to
discover that they will probably never uncover another Enron or Global Crossing
by simply watching the trading habits of corporate insiders.
Understanding the implications of big trades is complex and often confusing.
Dozens of insider transactions are reported every day to the Securities and
Exchange Commission, and most are part of the normal course.
Further complicating the matter, some insider transactions remain hidden for
more than a year after they take place. Enron executives were able to keep out
of the public eye some sales of company stock by selling to their company
instead of on the open market. Under SEC rules, sales to the company can be
reported to the SEC 45 days after the end of the fiscal year in which the
company accepted the stock.
"The information is so noisy," said Michael S. Rozeff, professor at
University of Buffalo's School of Management. "I think the average investor
will find it too complicated to do it by themselves."
Even the experts are cautious to use the information they harvest sparingly.
"Insider activity should always be used as part of a research basket," not
alone, Gerber said.
Waves of corporate stock sales often mean nothing, or are hard to interpret,
Gerber said. "Buying is always a more powerful symbol."
Executives who buy company stock generally have few incentives to do so,
besides the belief that the stock is cheap. On the other hand, executives who
dump company shares might have a slew of motives, from profit-taking to buying
a house to paying for a child's education. As a result, experts seek out large
bunches of executive sales to garner a trend, Gerber said.
"When you look at selling, you want to see what a group is doing as a whole,"
he said. "We call it a consensus, a consensus of activity."
Even investors who interpret insider data correctly are often hindered from a
timely reaction because of the lag between the point when executives trade on
the open market and when they report it to the SEC. Under current SEC mandate,
corporate insiders - people who either own a certain percentage of a company's
stock or are directly related to a company - must file a Form 4 detailing any
trades within 10 days after the end of the month in which a stock sale takes
place.
This often creates a lag of as much as 40 days between the time a sale takes
place and when it becomes public knowledge. That gap "does not (always) give
individuals enough time to properly analyze what the selling meant," said
Jonathan Moreland, director of research at Insiderinsights.com, and vice
president of Edgar Online.
This time-lag could narrow, however, if the SEC adopts recent proposals to
cut the time that companies report insider trades to a few days. A shorter
reporting time of insider trades could result in a swell of interest in
tracking insider trading, said Moreland.
Investors looking to track insider trades can find up-to-date lists of big
transactions on almost any financial services Web site. But lists of trades
could confuse the average investor.
That is why people who are serious about tracking insider trading should seek
professional help to filter the noise, said Rozeff. Keep in mind, however, that
analytical services are sparse and most of them cost.
One free service is Thomson Financial's Thomsonfn.com. The site provides
data, analysis and scoring of trades. For example, the site will track how
often a given stock goes up and down when a given insider buys or sells.
Moreland charges between $24.95 and $75 a month for his insider research. His
weekly newsletter, Insiderinsights, analyzes trades and provides buy and sell
recommendations. The more expensive service provides the newsletter together
with a spreadsheet that summarizes weekly filings.
New York's Argus Research Company also offers a service for retail investors
through its Vickers Stock Research Corp. The Vickers Weekly Insider costs
between $137 and $155 a year for 51 publications. It offers some commentary,
lists transaction and a service that rates the importance of certain insider
sales. Most of the paid services will provide prospective customers with free
samplings, so interested investors should shop around before deciding on a
product. -By Kaja Whitehouse, Dow Jones Newswires; 201-938-2243,
kaja.whitehouse@dowjones.com (END) DOW JONES NEWS 02-27-02 03:20 PM |
