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Tech Industry

Reading into insider trading

Industry insiders do not always act in concert with their personal trading decisions, but, when present, insider consensus can provide valuable clues for the short-run direction of specific industry segments.

Insider trading is most meaningful when you can point to industry confirmation.

A textbook example is recent insider distribution in computer services and information technology, which are particularly volatile industry segments. The groups were rocked in late September when Morgan Stanley Dean Witter cut its rating on high-flying industry leader Computer Sciences, citing concern over fiscal 2000 earnings growth.

Controversy ensued when analysts claimed that the company's management had become more guarded in its guidance of future Wall Street forecasts--a charge that later was disputed by company executives. The entire group sold off in sympathy as analysts began to express concerns that the Asian and Russian meltdowns would cause information technology clients (particularly banks and brokerages) to cancel planned expenditures. Many on the Street also felt that spending to correct the Year 2000 computer bug was beginning to peak, further dampening the long-term earnings outlook for the industry.

Insiders at Computer Sciences, Ciber, Compuware, and Analysts International demonstrated nimble timing, selling shares before the Street's fears began to surface. The chart patterns for all four stocks are strikingly similar, and each is one of the 20 constituents that make up the de Jager Y2K Index (which is off 30 percent from its July highs).

Five Computer Sciences executives sold a total of 31,400 shares during August and September, at prices ranging from 61 to 69.69 per share. Though it traded as high as 74.88 on September 23, the stock lost 10 percent of its value in one day in the wake of the Morgan report. Shares of Computer Sciences plunged to as low as 46.25 on October 2 before rebounding nicely to the current 59 level.

Ciber executives also were parting with shares during a similar time frame. Three Ciber insiders, including chairman and founder Bobby Stevenson and co-chief operating officers Lawrence Greenwood and William Storrison, sold 53,500 shares at a range of between 27.50 and 34.50 per share. Storrison and Greenwood were selling between September 21 and September 24, just before the stock got hammered on news of Morgan's downgrade of Computer Sciences. Despite trading as high as 41 a share in mid-July, shares of Ciber dropped to a 52-week low of 13.31 on October 8.

By comparison, Compuware insiders began selling in July and continued doing so right up until the industry's late September decline. Nine Compuware execs dropped 783,363 shares at prices ranging from 55 to 60.50. President Joseph Nathan disposed of 100,000 shares in July at a range of between 57.50 and 57.75 per share, and sold an additional 10,000 in September at 57.75 per share. Also selling 100,000 shares in late July was the company's senior VP of worldwide sales, Henry Jallos. Historical research indicates that transactions by VPs of sales typically are among the most meaningful, and Compuware's case was no exception. The company's shares have recovered from an October low of 38.75 (the stock currently is trading in the 52 range), though still are trading well off their September 28 high of 63.

Industry insiders do not always act so closely in concert with their personal trading decisions. But, when present, insider consensus can provide valuable clues for the short-run direction of specific industry segments.

Tracking Gates, Allen and Dell
I frequently receive requests from the media (and sometimes even from clients) to interpret insider sales at Microsoft by Bill Gates and Paul Allen--particularly in light of the company's current antitrust troubles (See related special coverage). This is a difficult exercise because both individuals are frequent sellers of large blocks of stock, and because their regular profit-taking is linked to the consistently stellar performance of Microsoft shares. Interpretation also is complicated by the fact that both men still maintain sizable holdings in the stock, even after their steady selling.

In Allen's case, he has used the proceeds from many of his Microsoft sales--particularly during the last two years--to establish positions in cable and media properties. His most recent foray into the media arena was a purchase of 1 million shares of stock in cable entertainment company USA Networks, at a range of between 19.63 and 24.63 per share. A director at USA Networks, Allen bought the shares in early September, after the stock had sunk to its lowest levels since October of 1997. Clearly, Allen has engaged in a strategy of using some of his considerable Microsoft wealth to diversify into what he believes to be one of the great growth areas of the next 20 years. His most recent content play is simply a continuation of that larger strategy.

That being said, I've calculated annual selling totals for Allen and Gates dating back to Microsoft's IPO in early 1986. For the purpose of peer analysis, I chose to compare their annual totals to those of fellow tech titan Michael Dell (whose company began public trading in October of 1988). In September, Dell sold 4 million shares of Dell Computer stock.

The following table shows the total number of shares sold annually by each of the three individuals (only Microsoft stock for Gates and Allen, Dell stock for Michael Dell). Note that these shares are not adjusted for subsequent stock splits and are strictly the amounts reported by each at the time of the transactions. Microsoft and Dell stock each have split six times since their respective initial public offerings.

Total stock sales (unadjusted) by Gates, Allen, and Dell
Year Paul Allen
(MS shares)
Bill Gates
(MS shares)
Michael Dell
(Dell shares)
1986 365,000 - -
1987 80,000 520,000 -
1988 100,000 447,500 -
1989 900,000 - -
1990 400,000 700,000 1,029,400
1991 1,625,000 2,735,000 707,000
1992 2,050,000 2,222,650 -
1993 1,660,000 3,853,000 258,000
1994 950,000 4,520,000 2,022,000
1995 1,000,000 - 1,677,000
1996 4,642,000 1,528,995 1,062,500
1997 11,115,000 8,635,213 1,086,000
1998 34,335,000 9,516,500 7,676,720
Source: Craig Columbus

Craig Columbus is vice president of ownership research for financial intelligence newsletter Disclosure. Columbus' group analyzes SEC insider filings and corporate data on behalf of institutional investor clients.