Tracking the Insiders
Insider trading--the legal kind, meaning the publicly reported stock transactions of the officers, directors and large shareholders of companies--has long been followed by many market analysts looking to gauge corporate prospects.
But is it really profitable to piggyback on insiders’ buying or selling of their own stocks?
A new book, “Investor Intelligence From Insider Trading” by H. Nejat Seyhun (MIT Press, Cambridge, Mass.), sheds some light.
Seyhun, a business professor at the University of Michigan, analyzed a database of every reported insider trade from 1975 through 1996. He found that, in aggregate, stocks of firms with net insider buying in any given month outperformed the broad market by 4.5% over the subsequent 12 months, while stocks of firms with net insider selling in any month under-performed the market by 2.7%.
It doesn’t work for each and every company, of course. Still, Seyhun’s data suggest that, on balance, insiders are indeed foreshadowing future stock performance with their buy and sell decisions.
With Seyhun’s numbers in mind, The Times asked Bob Gabele, president of CDA/Investnet, a Rockville, Md., research company that tracks insider activity, to sift through his database of the Standard & Poor’s 500 index and classify stocks as bullish, bearish or neutral, based on insider transactions from June through November of this year.
The accompanying chart shows Gabele’s assessment of companies with the most bullish and most bearish insider action.
“We always look for clusters--usually at least a net three buyers or sellers--since one or two can be more random than meaningful,” he said. “And before we get too excited, we look at things like the size of the company, past insider patterns and whether the company has incentive programs to encourage buying.”
Gabele says his research suggests that insider transactions are most likely to predict a stock’s performance for the six- to 12-month period following heavy insider activity, “so this list should be a good indicator through June [of 1999] or a little beyond” in terms of whether stocks will be higher or lower than today, relative to the market.
For the June-November period, the chart shows the number of insiders buying shares on the open market, which is usually considered the most bullish indicator; the number exercising stock options to buy; and, finally, the number selling shares.
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Gabele’s Most Bullish Insiders (listed alphabetically)
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Wed. No. of No. of No. of Issuer Ticker Close Buyers Options Sellers Apache Corp. APA $24.63 9 0 0 Ball Corp. BLL 44.25 4 2 2 Dayton Hudson Corp. DH 48.88 4 1 1 Dun & Bradstreet Corp. DNB 30.25 4 2 2 Engelhard Corp. EC 19.38 3 0 0 Great Lakes Chemical Co. GLK 39.25 5 0 1 Healthsouth Corp. HRC 15.13 9 1 0 Mirage Resorts Inc. MIR 13.56 5 0 1 Newmont Mining Corp. NEM 17.50 12 0 0 Pennzoil Co. PZL 31.00 6 0 0 Tricon Global Restaurants YUM 48.31 6 0 0 Union Pacific Resource UPR 8.75 13 0 0 United Technologies Co. UTX 108.31 3 2 1 Venator Group Inc. Z 6.06 5 0 0 Washington Mutual Inc. WM 36.31 6 3 0
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Gabele’s Most Bearish Insiders (listed alphabetically)
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Wed. No. of No. of No. of Issuer Ticker Close Buyers Options Sellers BMC Software Inc. BMCS $44.88 0 1 2 Briggs & Stratton Corp. BGG 48.44 2 4 4 Comcast CMCSA 57.38 0 1 4 Compaq Computer Corp. CPQ 43.50 0 6 13 Costco Cos. Inc. COST 68.63 0 4 8 Dell Computer Corp. DELL 75.44 1 8 20 Dover Corp. DOV 34.50 0 3 0 General Electric Co. GE 101.38 1 5 8 Intl. Business Machines IBM 185.00 0 5 7 Intel Corp. INTC 125.00 0 4 8 Peco Energy Co. PE 41.88 0 11 17 Southwest Airlines Co. LUV 21.81 0 2 6 Walgreen Co. WAG 60.13 0 4 9 Xerox Corp. XRX 111.13 0 2 6
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Source: CDA/Investn
