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Taking cues from insider selling

The market appears to have been experiencing a consolidation phase during the last couple of weeks. The insider trading picture among technology stocks looks very similar.

The market appears to have been experiencing a consolidation phase during the last couple of weeks, overreacting both positively and negatively to various pieces of economic data. To me, the insider trading picture among technology stocks looks very similar.

The broad, heavy insider selling of January and February has tapered off--in the large-cap tech stocks in particular. By the same token, it has been difficult to find the selective buys that were present earlier in the year, in beaten-down issues like Altera and Lam Research, and I think many tech executives are sitting on the sidelines waiting for clues on the direction of this market. From a seasonality perspective, we are entering the summer months, traditionally one of the busiest times of the year for insider selling in technology stocks.

Insider buying in tech stocks is almost always a fairly isolated event, though one individual's purchase may be sandwiched between sell decisions by several colleagues within the same firm. Because there is so much compensation-related insider selling within tech stocks, you will rarely find a stock with a pristine insider buying picture.

Take Western Digital for example, a stock with some of the more interesting insider buying, in my opinion. The storage stocks have been one of the most depressed segments of the technology sector, hard hit by both Asian exposure and an inventory glut. All of the major storage players, including Western Digital, recently have reported weaker-than-expected earnings. However, many on the Street are beginning to find value in disk drive stocks, as inventory begins to work its way through the channel. Relative strength and cash flow appear positive for the group as a whole, and some analysts have begun to upgrade the stocks.

Western Digital VP Marc Nussbaum purchased 27,500 shares in the company in February, at between $18.05 and $18.13 a share, a price that is around the current support levels for the stock. The support was tested but held firm in late April after the company reported its earnings, and Western Digital's stock since has moved up above the $20 mark.

Nussbaum's buy is the only the second Western Digital insider transaction at the company so far this year, a rarity for insiders at tech companies. The lack of insider selling is a bullish indicator. With the stock still well off its highs of $54.75, the insider buying, lack of insider selling, and improving industry fundamentals may signal a good entry point for the stock.

A big component of insider analysis is the identification of "anomaly" situations, such as insider trading decisions that stand out from historical behaviors. Some recent insider buying at Viasoft, a maker of Year 2000 fixes and other software solutions, fits that bill. Insider buying was absent from the stock during the last couple of years--until April, when the company's chairman and CEO, Steven Whiteman, and its CFO, Mark Schonau, purchased 20,000 and 6,000 shares respectively.

Viasoft is down 75 percent from its August 4 high of $65.25. Whiteman and Schonau were adding shares at prices between $15.75 and $15.88. Their buys--so close to the company's 52-week low of $15.06--may indicate that the stock has finally bottomed out. Whiteman was a seller of shares around the same time last year, when the stock was trading between $39.50 and $46.

I like to look for the presence of insider buying in conjunction with some notable catalyst, such as new management or a new product cycle. One case in which insider buying gave off very positive signals was at Rational Software, the maker of a full suite of software development tools. Much like Western Digitial, Rational has been a company in transition, though it appears to have resolved many of the integration issues caused by earlier acquisitions. More importantly, the release of new Rational products has led to more bundled suite sales and higher revenue for the company.

Insider buying at Rational began in October, near its 52-week low of $7.12, indicating that things were beginning to turn around for the company. Between October and January, eight executives at the company purchased over 800,000 shares, at prices primarily between $7.70 and $10. After reporting improved financial results, Rational has soared to $16.43.

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.