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News of 'Insider' Stock Sales Can Be of Value--if You Know What It's Telling You

June 16, 1996|CARLA LAZZARESCHI

Q. When I read about a company's officers and other "insiders" selling some of their shares in that company, should I conclude that the company has problems?

--G.H.

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A. Securities and Exchange Commission-required filings of stock transactions by a company's top-ranking people can be an important source of information about a company's prospects, but only if you fully understand what this data can and can't tell you.

For starters, let's stipulate that insiders, who include a company's officers, directors and largest shareholders, are usually in the best position to know what's going on in a company, both now and several months into the future. They can know about potential sales agreements and other deals that could materially affect, for better or worse, a company's fortunes. So it stands to reason that tracking their behavior in the stock market should offer us some insight into a company's likely performance.

That said, let's offer some perspective. For starters, insider sales usually exceed purchases because many of the shares sold were originally purchased through op-tions, which don't count as open-market purchases under SEC rules but do count, under those same rules, as open-market sales. So simply tracking transaction volumes could give you a falsely negative impression of a company's prospects.

Furthermore, insiders, particularly those who have large numbers of shares, might have a variety of reasons for selling some, including such prosaic, non-business-related ones as sending a child to college, paying for a wedding, building a home or splitting assets in a divorce.

As Gerald Eddie, a research analyst for the Institute for Econometric Research in Deerfield Beach, Fla., which publishes the Insiders Newsletter, says, "There is only one reason for buying stock, but there are a thousand for selling."

The most important indicators, Eddie says, are the number of shares a given executive is selling, including the percentage that sale represents of the executive's total holdings and whether the executive is acting alone or with a group of other large shareholders. If a number of top executives are selling significant portions of their stake in a company, it's certainly worth knowing.

One final note: Insiders are supposed to report their trades within 30 days of the transaction. However, many do not, apparently with impunity. But even if the insider meets the 30-day deadline, by the time this information becomes public, it may not be of value to an ordinary investor.

Nevertheless, if you are determined to keep track of insider transactions, this information is available in some specialty financial publications. Or you can subscribe to the Insiders Newsletter, which costs $100 a year. For more information, call (954) 421-1000.

Insurance Requirement Depends on Equity

Q. We purchased mortgage insurance when we bought our home last year. We pay $41.63 every month for the premium. Do we have to continue paying this for the entire life of our 30-year mortgage?

--L.C.

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A. Just about everyone who makes a down payment of less than 20% on a conventional (as opposed to an FHA or a VA) home loan is required to buy mortgage insurance. The sole purpose of that coverage is to protect the lender against losses stemming from defaults or foreclosures on properties in which buyers' equity is small.

Until real estate went into its current slump, most home buyers could count on rising property values to increase their equity in their home to 20% or more within a few years, meaning they only had to carry the insurance a short time.

Now a typical homeowner, unless he or she bought the property at below-market price, will need to pay off more of the principal in order to end the mortgage insurance obligation.

Once you've done that, however, it shouldn't be difficult to get out from under the requirement. All you'll need to do is talk to your loan holder or servicing agent and notify it of your intention to prove that a new appraisal will show that your equity in the home (either through increased property values or new cash from you) is now 20% or more.

Ask for the names of approved residential property appraisers in your area. You'll have to pay for the appraisal, which should cost about $300 to $500. If the appraisal shows that your loan-to-value ratio is below 80%, your lender should drop the insurance requirement.

By the way, be sure you haven't confused the mortgage insurance demanded by lenders with a type of "mortgage insurance" typically sold by life insurance companies. The latter type guarantees repayment of your mortgage in the event of your death and is entirely optional.

Carla Lazzareschi cannot answer questions individually but will respond in this column to those of general interest. Write to Money Talk, Business Editorial, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com

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