Insider Activity:
Although I do not post to or read this forum regularly any longer
(primariy due to the scare tactics used by some posters which
I don't care to read), I thought some of you may wish to know
what insiders have been doing during the slump of July. It is
a lengthy article, but one you'll be happy your read...the
INTC and ATML information is somewhere in the middle...
Vikas
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REPEAT:Insider Buys To Follow Insider
Sales: A Barron's Feature
By BOB GABELE
AP-Dow Jones News Service
NEW YORK -- Before the stock market's recent correction, lots of
corporate insiders became outsiders by dumping part, or all, of
their share holdings, reports Barron's in its Monday 5 edition.
Between January and May, insider sales averaged over $1.9 billion
per month, a figure substantially higher than 1995's monthly
average of $1.34 billion - a number that itself was well above the
$1 billion that had been the norm, on average, in every month from
1991 through 1994.
Now that stocks - particularly those on Nasdaq - have dropped, the
question is: When are the insiders going to buy?
Before answering that question, it's important to put insider buying
and selling into perspective.
Historically, insiders - who may be members of top corporate
management or simply large and savvy outside investors - have shown
a massive appetite for purchases soon after nasty times.
The Crash of '87, for instance, was followed by an avalanche of
insider buying that, at the time, was one of the first beacons of
relief in a market that looked as if it were about to replay 1929
all over again. Quickly, insiders snatched up shares, leading
students of their activities to some great oversold bargains.
Of course, market downdrafts affect most stocks, taking the good
down with the bad. Chances are, the stocks that insiders have bought
at lows carry less risk of springing negative surprises than those
that they have dumped at similar quotes.
Still, just because an insider, or a lot of insiders, are buying
doesn't mean that mimicking their trades will yield profits.
It's important, when assessing the significance of insider actions,
to compare the current activity of each insider with their past
activity patterns. Only then can all the pieces of the puzzle create
a picture.
Take, for instance, the October 1995 buys by Jan Bell Marketing
Chairman Isaac Arguetty, who picked up $62,000 worth of stock in
October 1995 as the shares seemed to be bottoming from their lofty
levels in the $30 range in 1989.
At first glance, the buys seemed to indicate his confidence in the
stock at its then-$3 level. A closer look at the bigger picture,
however, revealed a dramatically different story: In 1989, he had
cashed out of over $16 million worth of shares.
His reinvestment at the apparent lows didn't seem as impressive a
commitment when compared with the dollars he took out near the highs.
At the time, it seemed to us that the purpose of his buys may have
been more to show confidence than any serious personal investment
agenda. Sure enough, Jan Bell shares headed even lower. They're
trading a little above $2 today.
To avoid such disappointment, investors should be focusing on those
issues that had good insider profiles in the months prior to recent
insider buying.
Right now, Kmart provides a good example. Earlier this year, insiders
bought its shares in the $8.50 range. Their purchases impressed us -
my company, CDA/Investnet, tracks insider transactions - because the
shares had already moved up from around $6.
The buying was especially noteworthy because it came at a time when
much of Wall Street thought the company might be hurtling toward
Chapter 11. The aggressiveness of the insider buying indicated,
however, that Kmart was going to be successful in raising enough
capital to stay alive. The shares subsequently traded up to as high
as $14 (a 65% rise from the point where the insider buying began)
before dropping back in the recent market uncertainty.
In the wake of Wall Street's July swoon, however, which took the
shares once again below $10 at one point, heavy insider purchasing
resurfaced. Vice President Warren Flick, one of the earlier March
buyers, invested more than $1 million in 100,000 shares at prices
just above $10. The trade doubled his position. This is a very
positive signal.
Another company whose shares were battered in July is Jacobs
Engineering, an engineering, design and construction company
catering to the domestic electronics industry.
Since Jacobs does an estimated 15% of its business with
semiconductor makers, its shares caught the flu when the chip
makers sneezed last month. The stock dropped from its $28 trading
range to as low as $20 on the news that some key semiconductor
equipment makers were encountering rough going.
As the stock fell, the board of Jacobs announced a million-share
buyback program. And after the price fell, three insiders picked
up a total of 8,000 shares in the $21 range. They were buying for
the first time in the open market, having previously made all their
acquisitions by exercising options. This type of buying, from both
company insiders and the company itself, sends a positive message.
In the semiconductor sector, insiders at Intel and Atmel have been
sending strong messages, too. Insiders had been holding on to their
shares even when the stocks were near their all-time highs. Insider
selling in Intel, for instance, had been running at record lows
while the shares were making record highs - an impressive feat,
given the natural human desire to make money and lock in profits.
Perhaps even more telling, although subtler: Intel insiders have
very large amounts of in-the-money options, which they have not
been exercising.
The intrinsic value of these options could be wiped out if the
shares were to suffer a major blow, the likes of which has hit so
many tech firms of late. To us, this willingness to take on market
risk is an indication that Intel insiders, for whatever reasons,
remain bullish on the microprocessor giant's prospects.
At Atmel, the picture is similarly encouraging. Insiders have been
holding on to both shares and options. In addition, there has been
major insider buying, at higher prices.
One caveat: The growing scrutiny of such insider transactions
provides an opportunity for corporate orchestration meant to
mislead investors. Be wary of companies that are quick to point to
the emergency of insider buying in their shares. In other words,
big isn't always good and, often, subtle is better than blatant.
Initial public offerings and spinoffs have written a big chapter
in Wall Street's story over the past few years. And many of these
deals, especially in 1995, were accompanied by insider buying.
Then again, who wouldn't buy into a deal when, buoyed by the bull
market, the shares were virtually guaranteed to go to an instant
premium? For this reason, we discount any insider buying until the
shares have traded in the open market for a while.
Currently, the shares of many companies that went public in 1994
and 1995 or early in 1996 have slumped.
And which of these relative newcomers are proving irresistible to
insiders in the aftermarket? +Penske Mo- torsports+ is one; insiders
there have been picking up shares in the $25-$30 range. Another
beneficiary of insider purchases is Commonwealth Aluminum (where the
buys have come in the $15.75-$17 area).
Buying is also evident at Jos. A. Bank Clothiers ($2.25-$4.75
range); Norton McNaughton (around $7); Rawlings Sporting Goods
($7.75-$9.25); Republic Engineered Steels ($3.63-$6.13); WCI Steel
(around $4.50) and Westinghouse Air Brake ($8.75-$10.75).
When stocks come under pressure, it pays to examine those that are
able to weather the storm. Experience shows that these issues many
times join the ranks of top performers once the dust settles. If
insider buying is evident in an issue that is behaving this way,
the chances of it emerging as a winner are magnified.
We're currently seeing this type of pattern in Schweitzer-Mauduit.
The company is the largest maker of cigarette paper, holding 19%
of the world's market. Spun off from Kimberly-Clark in late 1995,
the shares offer a good play in the worldwide growth of American-
blend cigarettes but carry much less legal baggage than stocks of
the tobacco companies themselves. The shares have held up
admirably in recent weeks, and insiders have been buying, picking
up more than 59,000 shares at prices in the $25-$28 range this
year.
One thing that should be pointed out: Insiders are much better at
providing clues to under- or overvaluation than at timing the
market. Indeed, when a correction pulls most stocks down, even
those that insiders start buying may head lower before the shares
bottom out and begin ascending again.
Just look at Mylex. The stock of this electronics manufacturer,
which got as high as $27 earlier this year, was slashed in the
recent slaughter of tech stocks. Last month, three insiders bought
on the way down, paying up to $17 a share and as little as $11.50.
These people should have bided their time; Mylex subsequently
continued slipping, to as low as $10 before stabilizing, and
currently is around 14 1/2.
The overall picture, in the wake of July's downturn, is still not
completely clear and won't be for a few weeks. Reason: Insiders
have until Aug. 10 to file SEC forms disclosing their dealings.
However, based on my research, it's already clear that insider
selling, which had been so heavy earlier this year, has subsided
significantly. And it's equally obvious that we are starting to
see an increase in buying.
It will take a while to determine, however, whether purchasing
reached the impressive levels of 1987 or 1990. And even if it becomes
evident that insiders bought en masse, investors will still do well
to be cautious.
Oversold markets tend to rally quickly, then consolidate. In many
cases, a particular stock will have already moved higher by the time
the small-fry become aware that corporate managers or big outside
investors are scarfing up shares. And it's risky to buy at prices
significantly higher than what the insiders paid.
Our analysis shows that investors can beat the market, by mimicking
the buys of insiders, by as much as 15%. So, if a stock that insiders
have been buying has already advanced by 15%, much - or maybe all -
of the expected performance is already built into the price. In these
cases, investors are better off looking elsewhere or waiting for the
price to dip.
In short, as in other aspects of investing, patience is a cardinal
virtue when trying to profit along with the insiders. |
