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MARKET SAVVY | SAVVY CONFIDENTIAL

Despite Higher Prices, Insiders Snap Up Shares

October 27, 1998|WALTER HAMILTON | TIMES STAFF WRITER

In a bullish sign, corporate insiders have increasingly gobbled up shares of their own companies in recent weeks even as the stock market rebound has forced them to pay higher prices.

Traditionally, top executives and directors buy heavily after prices have fallen hard, a sign that the people in the best position to understand their companies consider the stocks undervalued. In the aftermath of the summer pullback, a slump that knocked the blue-chip Standard & Poor's 500 index down 19.3%, insider buying already had reached its highest level since the 1990 bear market.

But insider purchases have jumped significantly in the last five weeks, according to data from CDA/Investnet, a Rockville, Md., service that tracks insider activity.

Normally, insider selling of shares outpaces buying by about 2 to 1. That's because many executives receive part of their pay in the form of stock options, which don't count as open-market stock purchases but which do show up as open-market sales when the exercised options are cashed in.

But in the third quarter, the total number of shares purchased by insiders nearly equaled the number sold, according to CDA/Investnet. And in the last five weeks, insiders have bought two shares for every one they've sold.

"There's a lot of buying out there," said Nancy Fedorowicz, CDA/Investnet research analyst.

The action is broad-based. In June, insiders in just 14 industries were net purchasers, while 44 sectors experienced net selling. Now insiders have become net buyers in 54 industries and net sellers in just three.

One company with notable buying is Dayton Hudson Corp. (ticker symbol: DH), parent of the Target and Mervyn's department stores. Four insiders bought almost 41,500 shares between Aug. 18 and Sept. 3 at prices ranging from $38.25 to $43.75, according to CDA/Investnet. (The price now: $43.06.)

Like most other companies with insider buying, the stock was well off its recent high ($50.75 in late July). But unlike some stocks that had lost more than half their value, Dayton Hudson insiders bought at "relatively high prices," a strong vote of confidence in the company, Fedorowicz said.

Dayton Hudson insiders have a good track record of buying their shares soon before the stock rallies, Fedorowicz said.

Another stock that insiders have bought at favorable times is CommScope Inc. (CTV), Fedorowicz said. The firm makes coaxial cables for use in such areas as cable TV. Seven insiders scooped up 42,600 shares in September at between $11 and $13. Third-quarter profit topped estimates by a penny. The stock price now: $12.63.

Fedorowicz also likes General Nutrition Cos. (GNCI), a retailer of health and other personal fitness products. Insiders sold heavily in February and March, dumping about $8 million of stock when the shares were near their record high of about $40. But from early August through late September, six insiders bought more than $4 million of shares, Fedorowicz said.

At companies in which insiders have unloaded shares near the top, they sometimes make token purchases after a stock has plummeted. But General Nutrition insiders are rebuilding "quite a stake," Fedorowicz said.

Despite a slight rebound lately, General Nutrition shares remain way down from their peak, closing Monday at $15.06. General Nutrition has faced increased competition from big chains such as Wal-Mart Stores Inc. and low-priced vitamin sellers.

General Nutrition has responded by saying it will cut costs, and it has gotten vendors to agree to trim their prices. General Nutrition also has slashed its work force. On Monday, the company reported third-quarter profit in line with analyst estimates. Revenue rose 10% from the year-ago quarter.

Analyst Frank Ponticello of Prudential Securities Inc. looks for stocks that have positive "technical" patterns as well as heavy insider buying. That means the price and volume action of their stocks indicates that their share prices may soon rise.

He likes three companies in the commodity foods business: Suiza Foods Corp. (SZA), Smithfield Foods Inc. (SFDS) and IBP Inc. (IBP). Insider buying activity in the group had been dormant for two to three years, and activity in several companies is a good sign, Ponticello said.

He also is high on Tricon Global Restaurants Inc. (YUM), which runs the Pizza Hut, KFC and Taco Bell chains. Tricon Global held up well through the summer downturn and broke out of a "base"--or sideways pattern--at $40 last week to a new high.

"This stock held up like a champ," Ponticello said. "Whenever you see a stock do that, it tells you something."

Ponticello also favors Trigon Healthcare Inc. (TGH), a managed-care company based in Virginia. The stock surged 12% on Monday, to $32.50, breaking out of a short-term trading range on enormous volume.

Richard Cuneo, editor of Vickers Weekly Insider Report, likes Dayton Hudson, Fleet Financial Group Inc. (FLT) and CompUSA Inc. (CPU), based on recent insider purchases.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Hungry Insiders

Here are the industries whose corporate insiders--mainly executives and directors--were most active in buying shares in the open market between July 1 and last week. The figures include only open-market purchases, not stock-option exercises. Heavy insider purchases can indicate that executives believe their stocks are bargains.

Industry: Medical/health care

No. of insiders buying: 278

Industry: Broadcasting/cable TV

No. of insiders buying: 153

Industry: Small-loan companies

No. of insiders buying: 138

Industry: REITS

No. of insiders buying: 126

Industry: Savings and loans

No. of insiders buying: 125

Industry: Banks (Eastern)

No. of insiders buying: 108

Industry: Food processing/retailing

No. of insiders buying: 107

Industry: Banks (Southern)

No. of insiders buying: 93

Industry: Chemicals/fertilizers

No. of insiders buying: 85

Industry: Oil/gas production

No. of insiders buying: 79

*

*Source: CDA/Investnet

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