The Inside Track on a Bear Market

Jonathan Moreland follows insiders' stock transactions, and the numbers he has been seeing lately point squarely at another sell-off

By Robert Barker

Seven months ago, as the world and its financial markets were recovering from the shock of the terrorist attacks of September 11, corporate insiders leaped into the market to buy their own companies' shares. Jonathan Moreland, who has been tracking insiders' stock trades since 1995, spotted that trend and called it correctly in (see BW Online, 10/15/01, "Insider Trades: Take A Closer Look") just as he launched a new newsletter,

That bullish sentiment disappeared within weeks. Now, Moreland sees no evidence of a turnaround on the horizon from his examination of insiders' behavior. To find out why -- and how he's advising investors to make money in today's market -- I again reached Moreland by phone at his Manhattan office. Edited excerpts of our discussion follow:

Q: Why are you so bearish?


Our bearish outlook is obvious from the buy-sell ratios that we track and have tracked for years.

Q: Please define your main buy-sell ratio.


I look at the number of companies that had insiders filing Form 4s [with the Securities & Exchange Commission], indicating open-market purchases and sales. I make a ratio out of that. Again, it's the number of companies, not the number of transactions, number of insiders, or dollar value. There are pros and cons to all of those methodologies. I have found that the number of companies actually took out a lot of [statistical] noise.

Q: And, in the most recent reading, I gather you had more companies being sold by insiders than those being bought?


A lot more companies with insider selling than buying. In fact, for the entire month of April, it was the most bearish measure since I started collecting these stats in the mid-'90s. [The April] figure was 90.5% more companies with insider selling than buying.

Q: How long has this been going on?


It actually started way back in December, after the market recovered from the September 11 debacle. Insiders very clearly pointed out in September and October that the downfall was a huge buying opportunity. But as soon as the market bounced back to the pre-September 11 levels, insiders indicated once again that all of the old concerns that they had before the terrorist attack still existed.

Q: And, I gather, just in the last week, the open-market sales outstripped open-market purchases by 545 to 303. Is that also a particularly bad-looking ratio?


That's a bad-looking ratio, too.

Q: Lots of people aren't comfortable selling shares short, because it can be a little tricky, and the risk is hard to gauge. Is there any way to make money on the long side of this market? Or is it best to be in cash?


There are lots of good stocks out there.

Q: Such as?


I really like Isolyser (OREX ). I like LTC Properties (LTC ).

Q: Why, first, Isolyser?


Because it's a small, understandable, underfollowed company. The stock is already up 70% for us, from where we picked it at the end of last year, and it's making good on the promises that management has made: increasing profit margins, increasing earnings, and it has integrated an acquisition very efficiently. And this is very serious, tight management that is in this for the shareholders.

Q: What does the company do?


It makes...specialized covers that go over operating machines and things that have to be kept sterile during operations. Laparoscopic surgery is on the increase, and that means more machines in the operating room. These machines have to be covered, and Isolyser has a commanding share of the niche to cover these things. It doesn't sound very sexy, but when you look at the profit-margins increase, it's sexy to me.

Q: Tell me about LTC Properties.


LTC is a turnaround. It was in big trouble after a lot of its lessees, which were acute-care facilities, ran into financial difficulties.

Q: Is this a real-estate investment trust?


Yes. I'm in the common [stock]. It also has some preferred that's paying a higher dividend. The common's payout is not guaranteed, although for the past two quarters it did reinitiate a 10-cent payout. The company will make good on that level, assuming the financials continue to do as well as they're doing, but I'm really in this for the capital gains. I think the stock was severely beaten down. The company's customers are clearly on the rebound -- or rather, the worst is over, and LTC can focus on generating more cash flow, which it has done for quarters.

Q: What else is on your buy list?


Bradley Pharmaceuticals (BPRX ), Moore Corp. (MCL ), PRG-Schultz (PRGX ).... Also, I have a couple of shorts here. I'm short Spiders (SPY ), and I'm long the ProFunds UltraShort OTC Fund (USPIX ), which tries to double the performance of the Nasdaq 100 in the opposite way.

Q: So you definitely see the Nasdaq headed back down?


The market in general and the Nasdaq obviously have already come down quite a bit, but we are that bearish. That's what insiders are telling us.

Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His column appears every Friday, only on BusinessWeek Online

Edited by Patricia O'Connell

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