By Robert Barker
As a group, corporate insiders -- mostly directors and high-level executives -- have shown themselves to be excellent stock traders. When they buy, their stocks tend to beat the market. When they sell, their stocks on average trail the market.
Yet tracking insiders and the trading reports they file with the Securities & Exchange Commission (SEC) is as much art as science. Back in 1995, financial analyst Jonathan Moreland created his own Web site, InsiderTrader.com, to practice the art. The site drew a following, was sold to Individual Investor Group, and eventually wound up as a part of Edgar Online (EDGR ), which recently closed it as part of a move to focus on corporate customers.
Moreland, however, hasn't given up the ghost. He recently launched a newsletter, InsiderInsights.com, and has been closely watching insiders' moves since the September 11 attacks. And he's finding stocks to buy. Here, in edited excerpts, is what he had to say when I reached him by phone the other day:
Q: Do you have a reading yet on how the insiders have responded to the September 11 terrorist attacks, and what does it tell you?
A:The initial read is good. Among all the filings that have reached the SEC of trades after the [attacks], there definitely is a bullish ratio of purchases to selling.
Q: What are the numbers?
A:Well, first, let's look at where we were. Before, things were looking extremely bearish. And even more interesting to me is that back in April [of] this year, there were quite a few market pundits suggesting that the worst was over. And I was certainly hoping that was the case.
Q: But no?
A:The [bearish reading of our] market indicator kept us very, very wary of overall market conditions. In April, when the pundits were saying things were turning around, our indicator actually got more bearish, which was very surprising. But the insiders were right again.
Q: So, what are the insiders telling you now?
A:In the most recent week's filings, there were 62% more companies with insider purchases than with insider sales. That's an extremely bullish ratio.
Q: So you're saying that for every 100 companies that had insiders reporting sales of stock, you had 162 companies with insiders who purchased stock in September?
A:Yes, that's one way to look at it. The actual numbers were 225 with purchases, 139 with sales. Then, I took that and stripped out all of the pre-September 11 trades. Doing that, there were 177% more companies with insiders showing purchases than sales.
Q: Ordinarily, even when the market is in good shape, there are more insider sales than buys, correct?
A:Yes. And that makes sense because there are so many [employee stock] options that people trade in. So you expect more selling than buying.
Q: Is it your gut sense that this is an anomaly or a real change in direction?
A:The direction is obviously headed up, but does that mean you buy now or do you wait? I would say that the insiders are saying it's not time to sell the house and the kids and to buy, buy, buy right now today. That doesn't mean there aren't individual companies to go into.
Q: What looks good, then?
A:Take-Two Interactive Software (TTWO ).
Q: They make video-game software?
A:Yes. There's a whole new wave of gaming platforms due out this fall.
Q: This would be the GameCube from Nintendo and Microsoft's (MSFT ) Xbox, for instance?
A:Correct. These boxes aren't much fun without software. The earnings estimates have come down for Take-Two. They are delaying the release of some software because they are editing out some content that is deemed unsuitable now, after the attacks.
A:That brought estimates down from $1 a share this year to 60 cents. But these earnings aren't expected to be lost -- they're expected to be postponed, because these [delayed] games will be released.
Q: What else do you like? Any energy stocks?
A:The prices came way down on energy stocks, and the insiders started getting in. We actually saw this in filings the week after the attack.
Q: Which stocks showed heavy insider buying?
A:Anadarko Petroleum (APC ). We got in at $48 a share. Hanover Compressor (HC ), we got in at $21.50 a share. Suburban Propane Partners (SPH ), we got in at $25. Maverick Tube (MVK ), something that we have been in and out of, we got in at $9.
And we saw insiders take advantage of the plunge in these stocks that the attacks caused. One other thing, insiders in this industry tend to be early. But they tend to be right.
Q: What's your favorite idea now -- a stock that you would buy and hold?
A:I don't have one. It's very frustrating that the good ideas may only be good for a few weeks. Ideally, you want to keep the turnover in your portfolio down for tax reasons.
Q: What's an example of one that ran away?
A:One good idea that came and went was BE Aerospace (BEAV ). That was one of the first picks we recommended after the [September] crash. BE Aerospace insiders have a great history of trading their stock well.
And besides that, the stock had dipped to about half of book value, which is understandable. BE Aerospace depends on building out aircraft cabins for commercial airlines. We bought it at $4.62 a share.
Q: What are the insiders selling?
A:I'm definitely seeing more selling in tech, which I'm looking into for next week's newsletter. But not biotech, which hasn't been really affected. We have suggested Antigenics (AGEN ), at $12, and Genta (GNTA ), in which we got in at $8.57.
Barker covers personal finance in his Barker Portfolio column for BusinessWeek from Melbourne Beach, Fla. His barker.online column appears every Friday, only on BW Online. Questions? Comments? Post them directly by registering at BW Online's Forums
Barker covers personal finance in his Barker Portfolio column for BusinessWeek from Melbourne Beach, Fla. His barker.online column appears every Friday, only on BW Online
Edited by Beth Belton