Insider Action Flashes Buy on Tech
By Rebecca Byrne
Staff Reporter
07/05/2002 07:49 AM EDT
While individual investors have bailed out of the Nasdaq recently and pundits have recommended steering clear
of anything tech-related, corporate insiders have turned decidedly more bullish.
"Analysts have thrown in the towel [but] insiders are waving a new one," said Michael Painchaud, director of
research and principal at Market Profile Theorems, which tracks insider activity for institutional clients like Fidelity
and Putnam Investments.
According to Painchaud, the technology sector is
displaying more positive insider action than at any
time over the last 13 years, with companies like
Motorola (MOT:NYSE - news - commentary -
research - analysis), Electronic Arts
(ERTS:Nasdaq - news - commentary - research -
analysis), McData (MCDT:Nasdaq - news -
commentary - research - analysis), MSC Software
(MNS:NYSE - news - commentary - research -
analysis), and even Computer Associates
(CA:NYSE - news - commentary - research -
analysis) all showing accelerated insider buying
or an abatement of insider selling.
"Technology is a bad word, but insiders are
heading in here very dramatically, and it's just the
opposite to what they were doing in 1999 and
2000," he said.
Undecimated
Painchaud, who follows 2,517 stocks in 10 sectors, said the tech group has seen the most dramatic decile
change over the last few months, going from 2 in March to 10 today, suggesting to him that some tech stocks may
have hit bottom. "You rarely see tech, as a sector, move above 1 historically speaking," he said.
Market Profile's insider trading model works like this: The firm takes publicly available SEC filings on the
companies it tracks and runs the data through a computer. Each company is then assigned an individual decile,
or score, based on seven different factors, the most important of which is whether an insider actually bought or
sold shares.
If the purchase or sale was particularly large, or if the individual conducting the
transaction had been prescient in the past, the model gives extra weighting to
those trades. The stock's historical inside trading pattern is another input that
can affect the stock's final score, which ranges from 1 to 10, with 10 being the
best.
Although the final number is significant, Painchaud said it is less important than
the rate of change in the number. The technology sector, for example, has seen
a very sharp positive change in a short period of time, indicating that insiders
have turned more constructive.
Other sectors of the market, like financials and energy stocks, also have a high
score, but Painchaud stops short of drawing any conclusions because the numbers haven't changed noticeably in
the last few months.
Because insider buying has historically preceded gains in individual stocks, the data suggest the tech sector
could be poised to move higher. "Insider activity, modeled in the right way, does have predictive characteristics,"
Painchaud said.
In 2001, companies under his coverage that had seen positive insider activity rose 3.8% over a six-week holding
period, while companies seeing negative insider activity were down 1.45% over the same time. |
