The Investment U E-Letter: Issue # 258
Tuesday, July 22, 2003

Insider Stock Information: How To Use It For Profit in Your Investment Portfolio

By Dr. Steve Sjuggerud, President, Investment U

Corporate insiders are selling shares in their own companies at a rate not seen since 1986 an extremely negative sign for the markets looking ahead.

Today we’ll take a look at insider stock information and what that means for us as corporate ” outsiders.”We’ll review how to use this knowledge of what the insiders are doing as a leading indicator of where the market is going and a leading indicator of where our investment dollars should or should not be going.

Who’s Selling on the Inside Now

Since April 30 of this year, eBay corporate insiders have sold a whopping 1,979,000 shares - that's $220 million dollars worth at eBay's closing price yesterday of $111.

So eBay insiders sold nearly two million shares worth over $200 million dollars. Care to take a guess how many shares were BOUGHT by eBay corporate insiders in that same period? Remember, two million shares were sold so how many do you think were bought? Did insider buying at eBay add up to a million shares? Half a million? A hundred thousand? I know, let’s guess the ultimate answer from the TV game show The Price is Right: “I bid ONE DOLLAR”

Unbelievably, if you guessed $1, you overbid. The correct number of shares bought by eBay insiders in the last few months has been zero, for a value of zero.

Microsoft insiders have sold even more - 125 million shares since late April. At yesterday’s closing price of $26, that’s over THREE BILLION dollars worth of Microsoft stock sold by insiders. Again, do you care to take a guess at the dollar amount of insider buying in the same period of time? How about The Price is Right guess of $1 again - we can’t go wrong with that information

Yes we can. Not a single share of Microsoft stock was bought by a Microsoft corporate insider. Zero shares were bought, for a value of zero. At your $1 bid, you don’t get to go to the Showcase Showdown.

What All This Insider Stock Information Means

Corporate insiders should know what’s going on inside their own company better than anyone else. So the securities regulators (the SEC) require corporate insiders to let the world know whenever they buy or sell shares of their own company’s stock.

According to the book Winning on Wall Street by Martin Zweig (an excellent investing book), most academic studies of the activity of corporate insiders have found that corporate insiders have an excellent track record, almost always beating the markets with trading in their own stock.

Michael Burke of Investor’s Intelligence has found that insiders are generally early in their decisions. Burke normally uses the insider-trading data to look forward by a year. However, “Since insiders are now required to report quicker, the period might be 10 to 11 months.”

According to the latest Argus Vickers Weekly Insider Report (the industry standard on insider activity, visit www.vickers-stock.com), insiders are selling more than they have since 1986 - for every insider buy, there are 4.2 insider sells today. The last time we saw a ratio like that was back in 1983.

The Historical Perspective on Insider Buying and Selling

Looking back, Burke is probably about right with his “one year early” thought. Insider selling peaked in the first half of 1983, but the market continued higher until the end of 1983. The market was significantly lower by mid-1984.

In the case of 1986, insiders were about a year and a half early, selling off well before the crash of 1987 came. Interestingly, after the crash of 1987, this same indicator of insider buying versus insider selling showed the highest percentage of buys versus sells in history. Following the insiders and buying after the crash of 1987 sure would have been a smart thing to do.

Following the action of insiders and the information publicly available is just one piece of the investment puzzle. But when it reaches extreme levels, as it has now, it is worth paying attention to. With the highest ratio of insider selling since 1986, chances are we’ll see fairly tough times a year down the road, if not sooner.

While the corporate “outsiders” are buying stocks, the “insiders” are quietly selling. It may be smartest to follow the lead of those in the know.

Good investing,

Steve

Today’s Investment U Cribsheet

• You can track insider activity on your favorite stocks for free using Yahoo! Finance (www.yahoo.com). Just type in a stock symbol and hit “enter.” “Insider” will be one of your choices when the stock quote comes up. Click there. While there are various reasons an insider might sell, there is generally only one reason an insider buys: because he likes his company’s prospects. For a more complete reporting on insiders, check out www.vickers-stock.com. If you click on “Reports,” and look to the bottom right, you’ll see a few free tools, including the 25 most bought and sold insider stocks. Another nice service at a good value is Investor’s Intelligence (www.InvestorsIntelligence.com).
• If you’re looking for a service that scans insider activity and recommends trades with large profit potential, I can highly recommend Alex Green’s The Insider Alert. Alex was a bit of a mentor of mine when I started in this business. He is still at the top of the heap as one of the smartest and best investors I know.

Related Articles:

• Insider Stock Trading: Due Diligence For “Insider” Profits
• Insider Buying of Stocks: The Strongest Purchasing Signal in the World?

Investment U Archives