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Insiders May Signal Rebound

Stocks: Some analysts see bullish signs from transactions by company executives and directors.


Company insiders have been conspicuously reluctant to step up and buy their downtrodden stocks in recent months. Some analysts say that finally may be changing, although others aren't convinced insiders are turning bullish just yet.

Legal stock transactions by executives, directors and large shareholders--as opposed to the illegal kind of insider trading based on information not available to the public--are closely watched as signals of future price direction. Insiders have kept a tight grip on their wallets throughout the sustained drubbing the market has endured this spring, summer and fall, steadfastly giving no hints that they were bargain hunting or sensing a market bottom.

But the ratio of overall insider sale transactions versus purchases, as reported to the Securities and Exchange Commission in the eight weeks ended Friday, dropped to 1.56 from 2.17 in the previous rolling eight-week span, according to Vickers Weekly Insider. A ratio under 2 suggests a rising market, Vickers says, while a ratio above 2.5 suggests a weakening market. The new, lower ratio suggests that insiders are starting to see share prices as attractive and the outlook brightening, according to Vickers, even though Nasdaq fell 21% during the period covered by the report.

In another positive sign, federal filings of planned sales of $100,000 or more of "restricted" stock dropped sharply in October, Vickers reported. There were 3,042 such filings, down from the September total of 5,243 and the average of 4,229 during the first nine months of this year.

Restricted shares, which have not been registered previously, generally are acquired by venture capitalists or company founders or through merger transactions. Because these filings pulled back in a month when stocks were falling, it suggests insiders think there will be a better time to sell, according to Vickers.

"That's a pretty meaningful decline for this leading indicator," said David Coleman, editor of Vickers. "Early returns show insiders are reacting favorably to the low stock prices. It's likely that during October insiders were not only holding off their selling, but they may well have been in there buying."

In the past, restricted stock filings have tended to be a good predictor of the trend in overall transactions, Coleman added.

Although the latest insider report includes data through last Friday, information on completed insider purchases and sales often lags the actual execution of the trades by several weeks. So analysts will be closely watching the October filings made public in the next 10 days or so to confirm whether there really has been a change in insider sentiment.

Although their transactions involve only their own stocks, the collective wisdom of insiders can indicate where the market at large is headed. Many insiders got out before the crash of 1987, analysts note, and the rallies of late 1998 and late 1999 were preceded by pickups in aggregate insider buying.

Despite Coleman's cautious optimism, other analysts call the current picture muddy at best.

Bob Gabele, director of insider research at First Call/Thomson Financial and editor of the Insiders' Chronicle newsletter, notes that the surge in overall restricted stock sales that began in November 1999 has continued. Those sales, which averaged a total of about $4.7 billion a month last year, have been running at more than double that pace throughout 2000. For October, he estimates restricted sales at $11 billion.

"I wouldn't say the big picture is gloomy, but it's neutral," he said. "The sale numbers are high, though nothing to get alarmed about. Remember, there are a lot of new stocks coming off lockup restrictions from initial public offerings, and much of that activity comes from venture capitalists--who are, after all, in the business of taking profits."

Even if the big picture remains neutral, analysts see bullish signs at several companies, though they caution that investors should only use the data as one factor in sizing up a stock.

Gabele said insider buying has picked up at smaller telecom companies whose shares have been hard hit, including Mpower Communications (ticker symbol: MPWR), ITC DeltaCom (ITCD) and RCN (RCNC), all of which are off more than 65% in 2000, as well as Choice One Communications (CWON), which went public in February and has since shed more than 40% of its value. At Mpower, he noted, insiders have been buying on the open market while their stock options are underwater, in a sense doubling down their bet on the company's future.

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