Buying power
Internet insiders are not just selling
By Marc H. Gerstein, Director of Investment Products, Market Guide
September 18, 1999
It?s widely known that Internet stocks are vulnerable to a wave of selling by insiders, but selling doesn?t necessarily correlate with pessimism about the companies. Instead, it?s often related to expiration of various restrictions (in connection with equity offerings) against such sales. Even after recent market corrections, many Internet corporate insiders are sitting on huge paper profits and it?s perfectly reasonable to expect many of them to cash in to some extent by selling shares when they are able to do so.
But Internet insiders have also been buying some stocks. Observers must also be careful about drawing strong conclusions from insider sales, as they're often motivated in whole or in part by personal financial planning considerations that have nothing to do with the insider?s assessment of the company. Insider buys, on the other hand, do typically reflect the insider?s positive expectations about the company?s prospects.
But insiders aren't always perfect. Indeed, most of the buy transactions for the companies listed here occurred in the spring and early summer, before the net stocks faltered. So when it comes to timing, insiders seem as fallible as anyone does. They can even be wrong on fundamentals. Nevertheless, in the latter area, insiders are closer to their respective companies than others, so their opinions should not be casually dismissed.
Screening for trades
The table below lists those Internet companies from among the 400-plus in the Market Guide database for which there were at least 10 insider buy transactions in the past six months. Note that I?m looking at the number of buy transactions, not the number of shares purchased. Counting shares gives a less pure view of insider sentiment because it may also incorporate information about the financial wherewithal (or financial planning choices) of the individuals making the decisions. Look at it this way: Assume one insider buys 100,000 shares of Company A, and that 20 insiders buy 1,000 shares each of Company B. The table below has been constructed to rank Company B (with 20 bullish insider decisions) ahead of Company A (for which there was only one buy decision).
In creating this screen, I eliminated Internet companies that trade OTC and whose average daily trading volume is below 20,000 shares. I did this to ensure efficient tradability of all stocks that appear. I also omitted companies that are in, or only marginally beyond, development-stage status by requiring at least $1 million in sales in the latest reported quarter, a market capitalization of at least $50 million, and price-to-sales ratio (based on annualization of the latest quarter's sales) no higher than 200. Finally, in order to focus on interesting companies that might not readily come to light through other sources, the screen omits the large, well-known companies that are part of the S&P 500.
Internet Stocks Insider Buying
Internet stocks with significant insider buying over the past six months running whose stocks have lagged peer group averages
Company (Insider Buys) Research Reports Earnings Estimates
Mpath Interactive, Inc. (23) MPTH: research MPTH: earnings
Portal Software Inc. (22) PRSF: research PRSF: earnings
DLJdirect (20 DIR: research DIR: earnings
Copper Mountain Netw. (16) CMTN: research CMTN: earnings
ZDNet (15) ZDZ: research ZDZ: earnings
E-LOAN, Inc. (14) EELN: research EELN: earnings
Hoover's Inc. (12) HOOV: research HOOV: earnings
iVillage Inc. (12) IVIL: research IVIL: earnings
InsWeb Corporation (11) INSW: research INSW: earnings
priceline.com Inc. (10) PCLN: research PCLN: earnings
NextCard, Inc. (10) NXCD: research NXCD: earnings
Source: Vickers and Market Guide for Windows
Community action
Mpath Interactive Inc. (MPTH: research, earnings), which tops the list with 23 insider share purchases in the past six months, seems to be in the right business for the right time. It facilitates live Internet communities through its own web sites (www.hearme.com and www.mplayer.com) and by licensing its POP.X software to others.
HearMe is a live chat site that features voices, instead of the rapidly typed text traditionally used by cyber socialites. It?s available on Mpath?s site as well as others, such as Yahoo! and E! Online. In July 1999, Mpath create a new affiliate program known as myVoiceChat, which allows any web site operator to provide free access from his or her site to HearMe. In the first week of availability, more than 5,000 sites signed up. Users include community organizations, support groups (such as Attention Deficit Help), ethnic affinity groups, special interest groups, small business sites, and fan sites (such as Pokemon downloads, Unicorn Homepage and True Ghost Stories).
The Mplayer site features live interactive net-based gaming. It features games that incorporate strategy, action, role- playing, and sports, as well as card and board games. Separate sections of the site are dedicated to games produced by SSI, Eidos plc (EIDSY: research, earnings), and Macromedia Inc.'s (MACR: research, earnings) Shockwave. In July, the company introduced live voice-enabled poker that allowed players to talk about the game in progress, and bluff more effectively than they could when limited to keyboard interaction.
In the quarter ended June 30th, Mpath had 4.2 million registered users, up from 3.3 million on March 30th. Average monthly user minutes reached 200. And in the month of June, the number of unique visitors to Mpath sites topped 1 million.
John Powers, of BancBoston Robertson Stephens rates the stock a BUY in his August 12 report. He expects a loss of $0.25 per share in the September period and a loss of $1.13 for the full year. But he forecasts a narrower loss of $0.82 per share in 2000. According to the analyst, ?as individuals become more comfortable with new online person-to-business interactions, new online person-to-person interactions will become more acceptable and online communities will be the next wave of the Internet to flourish.?
Bill me later
Powers also rated Portal Software Inc. (PRSF: research,earnings) a BUY on August 20. Portal Software is the runner up on the list of insider purchases, with 22 buys in the past six months. The company provides real-time customer management and billing software for Internet Service Providers. In the second quarter, Portal closed a major deal with Qwest Communications Int'l Inc. (QWST: research, earnings), and since then has garnered deals with Covad Communications Group Inc. (COVD: research, earnings) and US West in connection with their broadband DSL operations.
Building upon this core, the company launched Infranet FreeServ, a product aimed at providers of free Internet service. Such customers don?t need billing functionality, but Infranet FreeServe does help them register users, track demographic information and monitor usage. Italy?s first free ISP, Tiscali S.p.A, selected Infranet FreeServ. Other Portal Software product initiatives are aimed at content providers, such as NatWest Group?s clearinghouse of digital music, and branded ISPs such as Virtual Internet Provider, an ISP that allows companies such as Toys "R" Us Inc. (TOY: research, earnings), Egg, Arsenal Football Club and Royal Bank of Scotland to offer "own branded" Internet access and e-mail services to their customers.
Direct influence
The insiders who catapulted DLJdirect Inc. (DIR: research, earnings) to third place on the screen may need some patience. The tracking stock for DLJ?s online brokerage unit certainly isn?t the only Internet equity to struggle since last spring. But it?s much harder to separate business performance from stock market sentiment here than is the case with many other net stocks. As with other online brokers, negative investor sentiment toward Internet stocks takes a direct chunk out of DLJdirect?s business (since many net stocks are traded through online accounts), as we?ve seen this past summer, when trading activity declined along with sentiment toward Internet stocks.
So in one sense, DLJdirect is a play on Internet stocks in general, much the way traditional brokerage stocks have often been used as plays on the overall stock market. Using that line of thought, one might well expect DLJdirect to flourish whenever the net sector rallies. But there are other considerations here. First the bad news: Relative to other online brokers, DLJdirect may not be the best play on an Internet stock rally. It outsources back office operations to DLJ?s Pershing unit for a per transaction cost. This variable cost emphasis leaves less upside profit potential from a surge in trading compared with other online brokers having more fixed back office cost. Now for the good news: When online trading slumps, DLJdirect?s variable cost structure is more burdensome.
Even from a front office perspective, online brokers are not interchangeable. According to analysts at Salomon Smith Barney, who initiated coverage in an August 24th research report with an OUTPERFORM-SPECULATVE rating, DLJdirect focuses on the high-end of the online brokerage market. ?The target customer is typically a self-directed, sophisticated investor with an above-average net worth who currently has an account with a full-service broker. These customers also tend to value the premium product offerings that DLJdirect provides such as access to its proprietary research and IPOs.?
Companies mentioned in this article:
Mpath Interactive Inc. (MPTH: research, earnings)
Macromedia Inc. (MACR: research, earnings)
Portal Software Inc. (PRSF: research, earnings)
Qwest Communications Int'l Inc. (QWST: research, earnings)
Covad Communications Group Inc. (COVD: research, earnings)
Toys "R" Us Inc. (TOY: research, earnings)
DLJdirect Inc. (DIR: research, earnings) |
