To capitalize on the current Internet frenzy, a host of companies have exerted considerable energy to articulate their Web strategy to Wall Street.
Although insider buying is almost non-existent in the pure Internet stocks, it can provide some valuable clues when looking for stocks that will benefit from Internet-related developments. It can also offer insight to whether or not a company is confident in their Web strategy. Spotting those stocks that hang around the edges of the Internet "halo," therefore, can be a very profitable endeavor.
At Clear Channel Communications, director Billy Joe McCombs purchased 200,000 shares during March at $56.93 to $59.58. Shares of this media company recently soared to a new a 52-week high of $76. Clear Channel will merge with rival Jacor Communications, a deal that will create a radio powerhouse and the nation's second-largest station owner.
What's more, both stocks rose after speculation that CBS' Infinity Broadcasting unit would venture into the Internet arena. Jacor has already inked deals with Internet broadcasting stalwart, Broadcast.com, to distribute some of its popular content programming via the Net. Clear Channel stock has shown up in a number of growth managers' portfolios, as well. McCombs' purchases are particularly meaningful, since insider buying is a fairly rare phenomena in large-cap growth stocks
Insiders were also sending valuable clues at Harbinger Corporation, a company that designs software to promote e-commerce on the Web, primarily through electronic data interchange (EDI). The firm has experienced the typical roller-coaster price ride that most small Internet-oriented companies have experienced at one point during the past two years. Its stock has traded in a 52-week range of $27.62 to $3.50, making its high on April 20, 1998, and reaching a low on October 1, 1998. What is very intriguing about this rise and fall, however, is the timing of insider activity during this period.
When the stock was near its high in early 1998, the company's insiders were selling shares. From January 15 to May 26 of that year, seven insiders sold shares worth more than $5.8 million. Notable among those sellers was Tycho Howle, the chairman and CEO, who accounted for over $2.5 million of the sales. Also a major seller was vice chairman David Leach, who sold nearly $700,000 worth of his personal holdings. These sales were well timed, since by early July the stock had lost 50 percent of its value and was on its way to bottoming at a yearly low.
Since October of last year, the stock has traded in a narrow range between $5.20 and $9.28. With shares well off their highs, the same insiders that so presciently sold months earlier have recently begun buying. CEO Howle has been the biggest buyer, purchasing 101,850 shares between February 17 and March 9 of this year, at prices ranging from $6.16 to $7.19.
On March 5, director David Leach exercised options on 52,500 shares and has held the entire position thus far. Also, president James Travers purchased 46,749 shares at $5.84 on March 8. Prior to this recent accumulation, other insiders, including David Leach, acquired a total of 175,500 shares during September and October 1998.
While we think this insider accumulation is a very bullish signal on its own, there are other reasons why we think this stock has potential.
We normally discount beneficial owners from our analysis because a great majority of them are trusts that are motivated to transact purely for cash flow and diversification reasons. However, when Paul Allen, the co-founder of Microsoft, is a beneficial owner who holds 7 percent of the company, this is something that we do not discount.
This endorsement by an industry leader lends an additional amount of credibility to a company that many small software firms are lacking. In addition, not only are insiders buying Harbinger stock, but the company is also buying its stock under a repurchase plan. Between October 1998 and March 1999, the company repurchased 10 percent of its shares outstanding, and on March 22, the company authorized a buyback of an additional 10 percent.
Finally, the stock's technical picture is improving. On March 22, the same day as the additional repurchase was announced, the stock broke through its 10-day moving average. On March 26, the 10-day moving average moved above the 50-day moving average, while the 200-day moving average remains in a downtrend with a decreasing slope.
This is a technical profile that we like. It indicates that there is not only considerable short-term momentum, but that the long-term picture is also improving. With continuing improvement in the stock's price action and continual endorsements through acquisitions by the company and its insiders, we feel that this stock has the potential to return to a considerably higher valuation.
Harbinger of late has made two significant announcements. Tycho Howle, speaking at the Robinson-Humphrey Institutional Conference, said that he was comfortable with the consensus estimate of 34 cents per share for 1999. More significantly, at least in these days of Internet mania, Harbinger introduced a website to support its customers. The site is focused on delivering the company's EDI solutions for business-to-business transactions and data sharing. The stock gained nearly two points on the news, for a 29 percent gain. With this latest price action, the stock is now solidly above its 200-day moving average.
In contrast to the positive price momentum of Clear Channel and Harbinger, insiders have been bargain hunting at deeply depressed JDA Software.
Once trading in the high 30s a little over a year ago, shares of JDA Software have sunk to $6.50. The company is the target of a series of class action lawsuits that allege the company overstated its reported revenue and provided misleading information about the firm's growth prospects.
Despite the woes, CEO James Armstrong continues to add to his stake. Armstrong purchased an added 112,800 shares in March after picking up 74,100 shares in January and February. Armstrong's latest buys may be an attempt to bolster investor confidence as the stock dropped last week to a new 52-week low.
Disclosure's co-director of research, Scott Vorhauer, contributed to this column.