Inside Track
Insider Buying Isn't Always
A True Sign of a Bull Market
By BRIDGET O'BRIAN and GREG IP
Staff Reporters of THE WALL STREET JOURNAL
Look closely at some stock purchases by
corporate executives and directors known as
insiders. Are the signals they send out really as
bullish as they appear?
Take the case
of Oakley Inc.
On Dec. 16, the
Irvine, Calif.,
eyewear
manufacturer
put out a press
release that
said its
chairman and
founder, James
Jannard, was
going to buy a
million shares of
the company's
stock. The
prices ranged
from $8.88 to $9.88. "I believe Oakley's stock is
substantially undervalued," Mr. Jannard said in
the release. Two months later, the company
announced he'd completed the purchase and
planned to buy a million more. Oakley's shares
rose 6.25 cents Tuesday at $13.0625 in New
York Stock Exchange composite trading.
Neither announcement noted that in June 1996,
Mr. Jannard had sold nine million Oakley shares
at $23.82 each, for proceeds of $214.4 million, in
a secondary offering of Oakley stock.
ALSO AVAILABLE
See lists of the biggest individual insider
trades of the past week and a rundown of
companies with the largest net change in
insider ownership.
Link Newcomb, Oakley's chief operating officer,
says legal counsel advised the company that
press releases on Mr. Jannard's purchases
should be issued. While "a lot of investors
indicated to us they viewed it as being a very
positive sign," he says he didn't know if sending
such a signal was Mr. Jannard's motivation.
"Simply put, the stock in his view was
tremendously undervalued at the time he made
the repurchases." There was no connection
between his purchases and earlier sales, which
Mr. Newcomb says were "very well known ... He
was buying it at tremendous value. What does
that have to do with the fact he was selling it
earlier?"
Seeking the Motivation for Buying
But while his purchases and sales make Mr.
Jannard a good market timer of his company's
own stock, it gives pause to some experts who
follow insider data. "We had corporate press
releases heralding the [purchase], then when you
looked back we saw the huge amount of sales, or
money taken out," says Bob Gabele, president of
CDA/Investnet, a database that tracks insider
moves. "My question is, with such a small
percentage of money going back in, is it really an
investment decision?"
Indeed, investors and others who follow insider
data say they scour the filings to see if buying
activity might be motivated by public relations or
other factors instead of a genuine sentiment
about the stock. "In some cases, [insider buying]
is a technique to generate public interest, just as
you'd use a roadshow, a conference call or the
traditional investor-relations techniques," says
Craig Columbus, vice president of research for
Disclosure Inc., an insider-trading data company.
"You have to be careful [to determine] why
someone is making the trade," says Joseph
Stocke, who as senior investment manager at
CoreStates/Meridian Investment Co. uses insider
trading as one factor in his stock selection
process. "A lot of insiders have become aware of
the fact investors are looking at [insider buying],
and at times they try to make it look more positive
than it really is."
Taking a Second Look
Mr. Stocke is leery of highly publicized insider
buying if it follows less publicized insider selling
at an earlier point of much larger amounts of
stock. He also takes a second look when several
insiders buy stock simultaneously at the same
price. Then, he adds, "you know it's a
coordinated action."
He points to American Stores Co., a Salt Lake
City food and drug retailer, which until June
required senior executives to buy stock in the
company. A new plan approved last month
covers even more executives and requires them
to own stock if they wish to qualify for enhanced
stock-option benefits. Mr. Stocke says, "They
look at it as a positive thing to do, and I agree,
but I wouldn't look at the insider data as being as
good a signal as if they were acting
independently of what the company told them to
do."
Dan Zvonek, manager of investor relations at
American Stores, agrees that insider buying at
American Stores is "due to the specific
circumstances," but says to downplay its
importance as a result is "kind of a cynical view.
The positive, from the shareholder point of view,
is that we have that type of plan, which is
motivating management to make the stock
perform."
At Credit Acceptance Corp., the company's
chairman, Donald Foss, bought 10,000 shares at
$20.50 on Feb. 7, just after the company's stock
plummeted amid a sell-off of sub-prime lenders.
In January, competitor Mercury Finance Co. had
disclosed that bookkeeping irregularities
required it to restate earnings.
Mr. Foss also bought 10,000 shares in the
Southfield, Mich., company on April 30, when the
stock was trading at $11, and another 3,000
shares on May 28, at $13.88. The share
purchases are tiny compared with his holdings of
23.7 million shares.
But in September 1995, Mr. Foss sold 2.4 million
shares in a follow-on stock issue at $24.50 a
share. He pocketed $59.4 million in the
transaction. Donald W. Busk, vice president for
finance at Credit Acceptance, said it's not
unusual for major shareholders to diversify their
holdings through such a stock offering. As for the
current purchases, "I haven't talked to Mr. Foss a
great deal about why he purchased recently; he
seems to feel it's attractively priced."
As for whether investors should give greater
weight to one set of transactions than another,
Mr. Busk added, "I think each investor is going to
have their own interpretation of it. All that stuff is
publicly available." |
