Insiders May Signal Rebound

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.

At San Diego-based wireless products maker Qualcomm (QCOM), whose stock rocketed nearly 30-fold in 1999 before its more than 50% drop this year, several seasoned insiders have been making their first acquisitions ever, Gabele noted. More important, insiders at Qualcomm and Titan Pharmaceuticals (TTP), whose products target cancer and Parkinson’s disease, have been exercising nonqualified stock options, meaning they have generated instant tax liability--which would really sting if the stock were to stay flat or fall.

Coleman said he has seen a steady pickup in buying among old-line companies over the last several months. Those with bullish patterns include tool maker Stanley Works (SWK), radio programming producer Westwood One (WON) and Anaheim-based apparel seller Pacific Sunwear (PSUN).

On the flip side, insiders have been selling many tech stocks as share prices have sunk, which Gabele and other analysts take as especially negative. Insiders at e-retailer Priceline.com (PCLN), for instance, have sold shares even though they have not been able to name their own price: The stock is down more than 90% this year.

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Bullish Insider Patterns

Some analysts are seeing indications that corporate insiders are finally starting to buy their companies’ stocks. Two analysts who follow insider transactions say recent activity at these companies has been especially positive:

Stocks highlighted by Bob Gabele of First Call/Thomson Financial:

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Ticker Wednesday YTD % Estimated Company symbol close change EPS Titan Pharmaceuticals TTP $41.15 +116.6% -$0.54 Advanced Digital Info. ADIC 17.19 -29.3 0.48 Qualcomm QCOM 84.19 -52.2 1.28 Citrix Systems CTXS 27.13 -55.9 0.59 Mpower MPWR 4.81 -85.8 -5.51

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Stocks highlighted by David Coleman of Vickers Weekly Insider:

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Ticker Wednesday YTD % Estimated Company symbol close change EPS Stanley Works SWK $25.13 -16.6% $ 2.23 Pacific Sunwear PSUN 20.06 -37.1 1.17 Westwood One WON 17.94 -52.8 0.34 S&P; 500 index 1,390.04 -5.4 57.89

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Note: Estimated earnings per share are for each company’s current-or, in the case of Advanced Digital Information, recently completed-fiscal year.

Sources: First Call/Thomson Financial, Vickers Weekly Insider, Bloomberg News