Not all insiders are created equal
By knowing the historical odds associated with prior trades, investors can better evaluate the potential significance of a new insider filing.
Because executives often trade shares to boost their personal portfolios or for private reasons, like to finance a child's education, it can be difficult to use the data to gauge whether to jump in or sell out of a certain stock. Executives also often make strategic purchases to boost morale in a firm, or generate PR with the investment community.
In addition, the sheer number of filings is overwhelming. The Securities and Exchange Commission receives more than 20,000 individual filings each month. Investors are frequently left asking themselves, "Which insiders should I follow? Which should I ignore?"
The most important thing to remember is that not all insider traders are created equal.
By knowing the historical odds associated with prior trades, investors can better evaluate the potential significance of a new insider filing. With this in mind, let's take a look at insider activity in the technology sector.
Based on my firm's recently launched insiderSCORES.com, which uses statistical tools to calculate insider track records across different holding periods, I found that one issue to watch is Globalstar Telecommunications, a provider of satellite-based phone services.
The company has launched a network of 44 low-earth-orbiting satellites manufactured by its founding partner, Loral Space & Communications. According to recent research, Globalstar Chief Executive Officer Bernard Schwartz has generated an average 45 percent return in the six months following his 10 prior purchases dating back to 1996.
On March 31, Schwartz bought 100,000 shares at $12.88 to $14.44 per share. The stock's fortunes then reversed and shares climbed higher as the company successfully completed the build-out of its satellite network.
From June 24 to 29, Schwartz averaged up from his March purchases, spending between $21.19 and $23.38 for 330,200 shares. By mid-July, the stock had climbed to as high as 33 before sliding back to current levels near 24. These gains resulted in a 91 percent, six-month return for the stock purchases in March.
The jury is still out, however, on how Schwartz will fare with his June purchases, because six months has not yet elapsed. But one thing is certain--Schwartz's appetite for the stock has not diminished. He recently added another 43,000 shares from Sept. 29 to 30 at $22.07 to $23.75 each!
The best are also buying at InfoCure , an Atlanta-based medical software design firm, where two insiders came together and purchased a total of 22,000 shares on Sept. 15.
Chief Executive Officer Frederick Fine picked up 2,000 shares while executive vice president, James Price, added 20,000 shares. These two individuals have mirrored each other's last five purchase decisions, buying shares on the same day each time. Shares of InfoCure on average were 49 percent higher in the six months following these five transactions.
In their most recent purchases in September, the pair paid between $23 and $23.13 per share when it appeared that the stock was preparing to make another run toward its high of 29. Insider stock purchases near a 52-week high are a powerful sign, signaling confidence that shares could move even higher. The executives' enthusiasm for the stock is understandable, as analysts offered "strong buy" recommendations based on steady earnings growth.
On a short-term basis, however, Infocure has run into trouble, sliding as low as 13.88 before rebounding to current levels around 16. However, keeping in mind a longer time horizon, these insider purchases could serve as a preview for stronger price performance in six months.
Another technology company that has produced recent buyers who have earned impressive returns is SonoSite, a maker of lightweight handheld ultrasonic imaging devices.
Directors Jeffrey Pfeffer and Dennis Sarti have grabbed some startlingly high returns following their purchases. Pfeffer has an impressive 89 percent average return over six months, while Sarti boasts a stunning 116 percent for his six-month average. Sarti's most impressive trade occurred during the fall of 1998 when he bought 10,000 shares of a suffering SonoSite stock at prices ranging from $6.75 to $6.88. Six months later, the stock more than doubled.
Pfeffer, who tends to buy less than 1,000 shares at a time, last purchased 700 shares in November at $6.50. He has not made any trades this year. However, Sarti has been adding shares during 1999. His purchase of 4,000 shares in May at $19.69 is currently enjoying a 30 percent return. Sarti continues to add to his stake even though the stock has moved higher, recently adding another 3,000 shares during September at $25.75.
His latest buys may also prove predictive as SonoSite continues to show signs of strength, finding frequent support around its 50-day moving average.
One executive who seems to have the inside track on his company's fiscal future is William Elmore, a director at software firm Wind River Systems. Wind River is banking its future on the success of Internet appliances, for which it claims to have technologies and services integral to their success. Elmore's five prior purchase decisions of Wind River stock (all of which occurred between 1993 and 1994) netted an average six-month paper profit of 60 percent.