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Inside Trader Craig Columbus How Do I...
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Craig Columbus believes high-level corporate insiders understand the future value of small companies better than Wall Street and attempts to buy shares alongside them at the right time.
Journal: March 20, 1998
Buy Integrated Devices Technology (IDTI), 250 shares at Monday's open.
Buy Trico Marine (TMAR), 400 shares at Monday's open.
Buy Glenborough Realty (GLB), 250 shares at Monday's open.
Just a quick note before I get started with my initial selections:
I am not a registered investment advisor. I typically act as the "eyes and ears" of institutional investors in the area of insider trading, helping them to interpret which filings are meaningful. My participation in Strategy Lab is strictly for simulation purposes to demonstrate what I believe to be one of the most powerful tactics for private and institutional investors alike. My aim is to help you understand the broader techniques of insider trading analysis if you care to implement them in your own investment decisions.
Technology insiders rarely purchase shares in their own companies. This is particularly true in the larger capitalization firms like Cisco (CSCO), Microsoft (MSFT) and Oracle (ORCL). The majority of technology companies extend generous option grants to their top executives, thereby eliminating the need to buy shares in the open market with after-tax dollars. Option packages have simply become part of the cost of doing business in Silicon Valley and serve as a major inducement for executive retention.
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However, you can still find an occasional insider purchase in the smaller-capitalization technology stocks. Out of all the sectors and industries we track, tech insider buying has historically proven to be one of the most powerful indicators of future value (along with biotechnology, REITs and regional banks). We look for cases across all industries where insiders have been buying shares in beaten-down, small-cap stocks.
Integrated Devices Technology
One such company is semiconductor maker Integrated Devices Technology (IDTI), which traded as high as 32 in August of 1995.
Insiders led us to Integrated Devices back in February last year after vice president William Cortelyou purchased 30,000 shares at 10.75 each. Two more bullish rounds of insider accumulation have followed over the past 12 months. Things really started getting interesting in June when two insiders opened their wallets and added to their positions. In a 200% increase in his common-direct holdings, chief executive Leonard Perham purchased 22,000 shares at 10.17 each. Perham joined IDTI in 1983 and has served in his present capacity since 1991.
Also involved in the June cluster of accumulation was director Carl Berg, who purchased 50,000 shares at 9.75. In addition to buying shares, Berg exercised and retained options for 8,000 shares at 1.94 each. The options were of the non-qualified variety, requiring Berg to incur an immediate tax liability (for the difference between the market price of 9.75 and the exercise price of 1.94) in addition to the cost of the exercise (the 1.94). Our research has shown that the exercise of non-qualified options is a very bullish indicator, and we like the fact that these are seasoned company insiders.
Despite the summertime insider buying, the stock traded between 9 and 13.50 for the rest of the year. Company execs began buying the stock again in November, forming a "double cluster" or second wave of accumulation by multiple insiders. This pattern of repeated buying is fairly rare. Four insiders purchased a total of 768,400 shares from Nov. 12 to Jan. 21 at 9.19 to 10.69 each. Director Carl Berg led the way again, picking up 735,000 shares at 9.19 to 11.31 each. Vice presidents Robin Hodge and William Cortelyou added 20,000 and 12,500 shares respectively. The buy upped Hodge's holdings by 350%. In addition to the continued buying, no one is selling at Integrated Devices (only one insider sale occurred during 1997). Tech insiders sell all the time as they cash in some of their numerous options, but that doesn't seem to be the case with IDTI.
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Breakout
Nine times out of 10, stocks that get beaten down have to build a base, trading sideways in a fairly tight trading range. We are not technical analysts -- not zealots anyway, but casual believers in some of their basic principles. The technicians would say that a stock needs to build a base for at least four to six months, shaking out the sellers before it can begin another big advance. Integrated Devices has started to move of late, jumping over 66% since the end of December. We first alerted clients at 9.50 and have essentially been very bullish on the stock ever since.
Integrated Devices' strategy is to transition away from the low-margin, commodity SRAM-chip business (about a third of its current revenue) into the higher-margin specialty memory for high-speed communications and Intel-compatible microprocessors. Product transitions are a dangerous game because they often lead to temporary slowdowns in revenue and earnings growth. If transition strategies prove effective, long-term investors can profit handsomely. The success of the IDTI strategy depends on acceptance by original-equipment manufacturers -- such as Compaq (CPQ) and Gateway (GTW) -- of the company's low-end microprocessor as an alternative to Intel's Pentium products.
Part of the Street's reluctance to completely embrace the stock stems from some concern over possible litigation issues. Historically, Intel (INTC) has aggressively protected its intellectual property rights against rivals like Advanced Micro Devices (AMD) and National Semiconductor's (NSM) Cyrix. Some fear that Intel will turn its guns on Integrated Devices once the firm makes greater headway in the microprocessor market. Certainly, potential litigation issues are always a concern. After all, we live in Washington, D.C. -- and are still waiting for our subpoenas from Judge Starr and his gang. But the current vigilant antitrust climate somewhat mitigates our concern. Furthermore, the continued insider buying provides support for that theory.
Putting our value hats on, we like the company's balance sheet, although it is more highly leveraged than its industry peers. Price-to-sales and price-to-book ratios are substantially lower than those of the average semiconductor stock. Cash and other liquid instruments exceed $200 million, or 20%, of the firm's market capitalization. This strong cash position contributes to favorable liquidity measures. The current ratio of 2.7 (current assets divided by current liabilities) and the quick ratio of 1.9 (current assets excluding inventory divided by current liabilities) are both nearly double the industry standard. These ratios provide some measure of safety against short-term obligations. Finally, Integrated Devices has improved its efforts to manage inventories, turning them over seven times a year (faster than the industry average).
During the past week, Integrated Device Technology announced a strategic alliance with IBM (IBM), in which IBM will manufacture IDTI's WinChip. IDTI will also continue to produce the chip in their two internal production facilities. Strategically, this deal ensures that IDTI will have the necessary capacity to meet consumer demand in the rapidly growing sub-$1,000 PC segment. Although IBM signed a similar deal last month to produce microprocessors for IDTI rival Advanced Micro Devices, the Street has embraced the IDTI announcement.
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The company continues to spend aggressively on research and development, shelling out over $125 million in the past year alone. While R&D as a percentage of sales is trending lower, this firm is still spending one-eighth of its market cap on research and development. The real question is, how much spending will be necessary to take low-end market share from Intel, Advanced Micro Devices and National Semiconductor? This stock is not for the faint of heart and some volatility is likely ahead. We are willing to take a chance on Integrated Devices even at these higher prices because the insider picture is very impressive, and the balance sheet is sound. We think the stock could be the sleeper of the microprocessor market and will look to add to our position on weakness.
Trico Marine
We are buying 400 shares of Trico Marine (TMAR) at the open because we like the insider consensus picture right now in the oil-drilling and services industry.
We think the group is oversold and want some exposure to the industry in our portfolio -- even if just for a trade. Insiders are adding to their positions -- either via purchases or option exercises -- at Global Marine (GLM), Schlumberger (SLB) and BJ Services (BJS) and insider selling has decelerated dramatically across the broader industry. The group has gotten hammered, and we get the sense that industry execs are starting to feel that the Street has overdone it. Oil-drilling insiders have a pretty good track record of timing both their purchases and sales.
Trading at 19, shares of Trico Marine Services are also well below the 52-week high established in October at 45.50. Two insiders, including president and chief executive Thomas Fairley, stepped in to purchase 12,000 shares Feb. 23-24 at 18.50 to 19.85 each. The stock trades at a substantial discount to the industry based on earnings, book value and cash flow. The company's gross margins and net margins are also very compelling relative to its peers.
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Glenborough Realty Trust
From a top-down perspective, we are still bullish on the financial stocks. Insiders have given excellent clues in the real-estate investment trust arena over the past three years -- buying the stocks on sluggish performance during the first part of the year before the industry's second-half rallies.
As a result, we are also adding 250 shares of Glenborough Realty Trust (GLB) to our portfolio. The company's funds from operations have been growing faster than the industry through aggressive acquisitions, and analysts expect the trend to continue for the next couple of years. Funds from operations are expected to grow at 15% over the next year (50% higher than the industry). We feel the Street has yet to fully value its growth prospects.
Seven insiders were buying the stock during October of last year (47,454 shares at 24 to 25 per share). The consensus of activity was particularly impressive as it extended to most of the company's top executives. Two insiders picked up a small number of shares in February (1,200 shares at 26.37 to 28.62). Although the size of the recent buys were substantially smaller, they do represent a continuation of the positive insider outlook.
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