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The Evolving Art of Interpreting Insider Buying
By Eric Moskowitz
Senior Writer
1/27/99 10:59 AM ET
It was the middle of August and all was not well inside CompUSA's (CPU:NYSE) Dallas headquarters. The company's stock price had melted into the midteens from its high of 35 amid stiff PC-industry price competition. Wall Street wasn't responding favorably to CompUSA's recent purchase of the largely unprofitable rival Computer City franchise.
What was needed, it seemed, was a good round of insider buying.
In late August and early September, two dozen company insiders scooped up more than 500,000 shares of the leading PC retailer. The company's CEO, James Halpin, led the charge, snapping up more than 200,000 shares at prices ranging from 13 to 16, according to data tracker Baseline. "It looked like a coordinated effort to me," recalls Paul Elliott of CDA/Investnet, which monitors insider-trading activity.
Baseline
CompUSA chat boards lit up with the news: "Nine separate insiders purchased 286,000 shares in August ... nine separate insiders! These guys know what they are doing," wrote a Silicon Investor poster on Sept. 5. "Although this may take months to pay off in a big way, I'm certain it will pay off." By Sept. 23, CompUSA's stock had shot up to 20, a 70% rise in just three weeks.
Now, months later, CompUSA's stock is about as popular as Bethlehem Steel's (BS:NYSE). It was off 3/16 Wednesday at 11 9/16.
Since the summer, however, the PC business has made a remarkable turnaround, breaking out of its six-month slump and registering its best holiday season in years. In December, while CompUSA's main competitors -- Best Buy (BBY:NYSE) and Circuit City (CC:NYSE) -- were posting double-digit year-over-year sales increases, CompUSA said its December sales tumbled 4.7% from a year earlier.
"I kind of feel as if they misled me," writes a cyberinvestor now. "Good thing I didn't put too much money into CPU." CompUSA executives didn't return numerous calls seeking comment. Adds another disgruntled poster, "I can only say that no wonder CompUSA only goes down. Their customer service is the worst. Yesterday I went to buy a few hundred dollars [worth of merchandise], and I have their credit card with no payment due. They said they could not be bothered to get an authorization. They will lose me and many clients and, yes, I own the stock."
Traditionally, insider buying by executives has been viewed as a bullish sign by investors because "there is a perception out there that they really believe in the short-term upside potential of the stock," says Graef Crystal, editor of the Crystal Report, an executive-compensation newsletter. After all, why would executives who know all the details pour in their own money if there were any risk? But in today's momentum-driven market, insiders are increasingly seeing the need to "get their stocks going, by any means necessary," says Crystal.
CompUSA's efforts have, at least for now, failed miserably, but that hasn't stopped a host of other companies from trying to boost their stock with increased insider buying.
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The exercising of options accompanied by a quick sale 'could be the rats bailing out of a sinking ship,' says Graef Crystal.
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Just ask Ingram Micro (IM:NYSE) CEO Jerre Stead, who bought a million Ingram shares with his own money in late December. The move, which was highlighted in a press release, underscored the lengths to which executives will go to inspire shareholders. It also came just a week after Ingram's stock fell more than 12 points to 33 5/8 after a December warning that the company wouldn't meet analysts' expectations for its fourth quarter. The stunt didn't help the computer distributor's stock price, however. Its stock was off 1/4 at 32 3/4 Wednesday.
Lately, using the media to hype insider buying to boost stock prices has grown more frequent, says CDA/Investnet's Elliott, who recently put out a report titled "When Executives Want You to Know They Are Buying Their Stock." He says, "Management of struggling companies such as Ingram Micro see this now as another tool they might use to get investors a little excited about their stock." Ingram Micro representatives weren't immediately available for comment.
Another way is for companies to strongly encourage insider buying. Some companies, for example, have a provision that requires certain insiders to maintain specified stakes in the company over the course of their employment, says Elliott. Communications-equipment maker Intervoice (INTV:Nasdaq), notes Elliott, has ownership guidelines that require the chairman and CEO to own 3.5 times their annual salaries in company stock and some lower-ranking officials to own 1.5 times their pay. Between Oct. 29 and Dec. 31, four executives bought 13,480 Intervoice shares to fulfill holding requirements, says Elliott.
To promote insider buying, some companies lend money to executives to buy stock or to exercise stock options. The key to these loan programs is whether executives subsequently hold the shares, implying some belief in the long-term value of the stock, or sell them. If the executive doesn't sell, it usually means he or she is bullish about the company's future. "But heavy exercises portend lower stock prices in the future because these executives are taking a lot of cookies out of the cookie jar," explains Crystal. The exercising of options accompanied by a quick sale, he adds, "could be the rats bailing out of a sinking ship."
Drug giant Monsanto (MTC:NYSE) has a substantial loan program in place. In May 1996, a number of insiders received interest-bearing loans to buy common stock. As of the company's March 1998 annual filing -- the only time these programs are spelled out to shareholders -- CEO Robert B. Shapiro had more than $5 million in outstanding loans, and a handful of others had more than a million dollars. In all, $21 million had been lent to executives in order to buy Monsanto. Vice Chairman Richard U. De Schutter, for example, one of the participants in the loan program, bought about $1.5 million in stock in October and December.
Loan programs are not required to be listed in a company's 10-K filing, making the practice hard to discern. "It really is a sneaky move by the company to give the perception that there is insider buying going on," says Elliott, who notes the practice needs to be disclosed in a company's annual report if a company loans more than $60,000 to a company officer.
While insider buying has picked up recently, the significance of these purchases has become more complex to discern. For investors, the lesson here is that insider buying does not always say great things about a company. In the end, no amount of insider buying at a company like CompUSA can outweigh its poor performance.
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