More Often Than Not, the Insiders Get It Right

Strategies
More Often Than Not, the Insiders Get It Right

By MARK HULBERT
Published: February 27, 2010

CORPORATE insiders are sending fairly positive signals about the market.

When stocks began to fall in mid-January, insiders cut back on sales of their companies’ shares and increased their purchases, according to David Coleman, editor of the Vickers Weekly Insider Report.

That adds up to at least a “neutral” stance, he wrote to clients, and implies that the recent decline won’t turn into a full-blown bear market.

But, as a market indicator, how reliable are the sell-and-buy decisions of insiders like corporate officers, directors and big shareholders?

While these insiders have a long history of correctly anticipating the market’s direction, they haven’t done all that well in the last few years. As a group, insiders failed to recognize the top of the bull market in October 2007, and didn’t anticipate the depth of the decline that followed.

After these missteps, have insiders’ trades outlived their usefulness as a basis for market timing?

Probably not, says H. Nejat Seyhun, a finance professor at the Stephen M. Ross School of Business at the University of Michigan, who has studied the behavior of corporate insiders for many years. In an interview, Professor Seyhun said that insiders were not infallible, and that their recent failures were hardly their first misreading of the market’s direction.

But since 1975, the earliest year he has studied, insiders have been correct far more often than they’ve been wrong, and this is still likely to be the case, he said.

And there is no evidence, he added, that insiders have lost their ability to tell when their own companies’ stocks are undervalued. In the late 1970s and early ’80s, for example, he found that the average stock bought by an insider outperformed the overall market by three percentage points in the 50 days after the purchase.

For the most recent 10-year period in his sample, through 2008, the comparable 50-day advantage for the insiders was 3.3 percentage points. That’s striking because it includes the bulk of the 2007-9 bear market.

Given the variability of the year-by-year results, Professor Seyhun cautions that it’s not clear whether insider purchases are more profitable today than they were 30 years ago. But, he argues, his results show that insiders by no means are losing their touch.

Though the professor’s analysis extends only through 2008, data collected by the Vickers Weekly Insider Report show that even though the insiders missed the bear market, they can nevertheless take credit for anticipating the market rebound that began a year ago. Leading up to the market’s low in March 2009, for example, insiders as a group behaved more bullishly than they had in more than a decade.

Consider an indicator that Vickers calculates each week, representing the ratio of the number of shares that insiders sold over the previous eight weeks to the number they bought. That ratio dropped to as low as 0.45 to 1 in the weeks just before the bear market ended. That was the ratio’s lowest level since December 1990, at the beginning of the great ’90s bull market.

The more recent low, of course, was followed by a 10-month rally in which the Standard & Poor’s 500-stock index gained some 70 percent.

By November, in contrast, this sell-to-buy ratio had risen as high as 5.21 to 1, according to Vickers, more than double its long-term average of around 2.5 to 1. That signaled to Mr. Coleman that the market was vulnerable to a decline — and, indeed, the market did start to fall in mid-January. At its lowest point, the S.& P. 500 was down nearly 9 percent from the mid-January high.

But in recent weeks, insiders have been cutting back on sales and increasing their purchases. As a result, the sell-to-buy ratio has fallen back to 3.52 to 1, according to Vickers.

Though that is still higher than the long-term average, the trend suggests to Mr. Coleman that the recent downturn is likely to be “only a near-term correction.” He said that his firm was “increasingly optimistic about the future performance of the overall markets.”

Had the sell-to-buy ratio increased in the wake of the market’s pullback, Professor Seyhun added, we would have had reason for worry. It would have meant that insiders had no confidence that their shares would be recovering anytime soon, he said.

“Fortunately, and at least for now,” he said, “insiders are not exhibiting such eagerness” to sell.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: strategy@nytimes.com.

http://www.nytimes.com/2010/02/28/your-money/28stra.html

Insiders' actions in 3-A Resources

The share price of 3A rose rapidly to a high level recently.  What actions did the "smarter" insiders in 3A take?

Click here:
http://www.klse.com.my/website/bm/listed_companies/company_announcements/changes_in_s_holding/index.jsp

Type of transaction Date of change No of securities Price Transacted ($$)
Disposed 15/10/2009 2,448,002
Disposed 16/10/2009 2,300,000

Too Perfect Timing

From The Times October 16, 2009

Dentist Neel Uberoi ‘made £150,000 through insider trading with intern son’Michael Herman

A dentist made a “fabulous” profit on shares after his son, who was on a work experience attachment, tipped him off about imminent takeover deals, a court heard yesterday.

Neel Uberoi, 62, bought tens of thousands of shares in three companies based on “precise information” from his son Matthew, 24, who was on a work placement at Hoare Govett, one of the oldest banks in the City, it was alleged.

Leaking information about an upcoming takeover and buying shares based on that information are criminal offences.

Known as insider dealing, and punishable by a maximum of seven years in prison, the offences are possible because a company’s share price usually increases with the news that another business wants to buy it, allowing an insider to buy shares ahead of the crucial announcement.


Mr Uberoi and his son are each accused of 17 counts of insider dealing by the Financial Services Authority (FSA), the City watchdog that is responsible for policing and prosecuting illegal share deals. The pair deny all charges.

John Kelsey-Fry, QC, for the prosecution, told the jury that Mr Uberoi, from Kenley, in Surrey, was able to time his share purchases “exceptionally well” because his son, who lives in Fulham, West London, was part of the team advising on the transactions at Hoare Govett, which is now part of the Royal Bank of Scotland.

Mr Kelsey-Fry told Southwark Crown Court that Mr Uberoi’s most profitable trading was in the shares of NeuTec Pharma, a British pharmaceuticals company taken over by its Swiss rival Novartis in May 2006.

Mr Uberoi, who had never owned NeuTec shares before, began buying them on a Tuesday morning after a Bank Holiday weekend, Mr Kelsey-Fry said. Over the next eight days he spent about £126,000 buying further NeuTec shares at an average price of £5 each.

The previous Friday a crucial meeting had taken place between senior members of Matthew Uberoi’s team at Hoare Govett and their opposite numbers at Lehman Brothers, the bank advising Novartis on the takeover.

Two hours after Mr Uberoi’s final purchase of NeuTec shares the company announced that it was in takeover discussions with Novartis. The share price immediately doubled to more than £10, allowing Mr Uberoi to sell his shares for a £140,411 profit.

Mr Kelsey-Fry told the jury that this pattern was repeated with the shares of two other companies: Transense Technologies, taken over by Balfour Beatty, and Gulf Keystone Petroleum, which announced a significant collaboration with British Gas. The court heard that Mr Uberoi spent more modest amounts on these two companies but that he was “equally fortunate in his timing”.

“On each of these occasions his son was working on the very Hoare Govett team advising on the transactions about to be announced,” Mr Kelsey-Fry said.

The case continues.

http://www.timesonline.co.uk/tol/news/uk/crime/article6876971.ece

Heavy selling after Bonus Announcements have been made

The Peril of Chasing Bonuses:  There is strong evidence of heavy selling after bonus announcements have been made

The residual movement is strongly downward soon after a bonus announcement has been made.  This strongly suggests that there is heavy selling by some of the investors.

Who are those doing all the selling? 

The sellers certainly do not come from the general investment public since they all think that bonuses are such good deals that "they would be fools to sell out now".  It seems that the sellers can only be those who know that bonuses are not what they are made out to be and / or those who have managed to pick up shares cheaply. 

The sellers are likely to come from amongst the fundamental investors who understand the meaning of bonus and also the insiders who, knowing more than the public, must have bought shares on the cheap just before the announcement. 

As the decline is the greatest among shares which subsequently do not increase their dividend, a lot of the sellers must be insiders who know that the future of these stocks is none too bright.

Either way, the pititable smaller investors have to pay dearly for their ignorance and fascination with bonuses. 

Insider Trading or Insider Inspired Trading prior to Bonus Announcement

The Perils of Chasing Bonuses:  There is strong evidence for the existence of either insider trading or insider inspired trading prior to bonus announcement

There is clear evidence that the price tends to move strongly upward from between 15 - 20 weeks before a bonus announcement.  This is the approximate point at which most boards of directors make a decision regarding a future bonus issue. 

If the news of a forthcoming bonus is kept watertight, there should be no movement at all until the announcement is made.  The fact that on average, stock experience a residual movement of between 10 - 12 percent in the last three to four months before an announcement means that there must be either some insider trading or insider-inspired trading taking place. 

The amount of movement is not that large on an average but this average conceals the fact that many stocks experience considerably larger movement than this and these are the stocks in which insiders or their "friends" stand to make a lot of money.

** Insiders Can Alter Market Value as Their Needs Dictate

The value of the stockholdings of insiders is measured by what they can do with the business if and when they want to do it.

• If they need a higher dividend to establish this value, they can raise the dividend.
• If the value is to be established by selling the business to some other company, or by recapitalizing it, or by withdrawing unneeded cash assets, or by dissolving it as a going concern, they can do any of these things at a time appropriate to themselves.
  

Rarely if ever do (controlling) insiders suffer loss from an unduly low market price which it is in their power to correct.

• If by any chance they should want to sell, they can and will correct the situation first.
• In the meantime they may benefit from the opportunity to acquire more shares at a bargain level, or to pay gift (and prospective estate) taxes on a small valuation, or to save heavy surtaxes on larger dividend payments, which for them would mean only transferring money from one place where they control it into another.
  

To the extent that operating management and inside stockholders form a cohesive group - and this is more typical than not in corporate affairs - the insiders must be considered as opposed in a practical sense to the improvement of bad management.

• They are often opposed to the payment of an adequate dividend, because they save taxes by a low dividend and they have effective control over the undistributed earnings.
• A holding-company setup may be of great strategic advantage to them, and they can terminate its disadvantages whenever they wish.
• The same is true of the retention of excessive capital in the business.
  

Thus on many counts the insiders are likely to look upon corporate policies in ways diametrically opposed to the interests and desires of the typical outside stockholder.

• We believe that the public stockholder is entitled to have his legitimate interests preferred over the special interests of the insiders.
• Once the public has been asked to invest its money in the common stock of any company, the management and the controlling stockholders should recognize a continuing obligation to conduct the business in all respects as trustees for the public stockholders and to follow such policies as are conducive to satisfactory investment results by the ordinary, outside owner of their shares.
• This principle is in accord with the spirit of our laws. It has not been applied as yet to any extent in legal cases, because, we believe, the issues are somewhat subtle and they have not been presented to the courts with sufficient clarity and vigor.
  
  

Ref: Security Analysis by Graham and Dodd

Follow the leader? Insight into insider stock buys

Follow the leader? Insight into insider stock buys
Insider purchases and sales noteworthy milestones but no road map to investing success
Dave Carpenter, AP Personal Finance Writer
Wednesday February 11, 2009, 5:21 pm EST


Yahoo! Buzz Print CHICAGO (AP) -- When a top executive buys or sells shares of his company in great number, it could be a telltale signal of what lies ahead for all investors.

But be careful before you follow in a CEO's footsteps. Knowing how much stock to put into an insider's actions, literally and figuratively, is a tricky business.

"The most important aspect that the lay investor should keep in mind is that it is a first screen," said Jonathan Moreland, director of research at InsiderInsights.com. Despite that caveat, though, "it's the best one that I know of," he added.

Assessing insider transactions is a lot more useful as an investing tool than it used to be.

That's because a publicly traded company's officers, directors and anyone who owns more than 10 percent of the shares is required to report any purchases or sales of their company's stock to the U.S. Securities and Exchange Commission within two business days. This means they can be quickly digested by investors checking the SEC Web site and any number of financial sites such as Yahoo Finance and MSN Money.

Until corporate scandals including Enron and WorldCom prompted reforms in 2002, companies had up to 41 days after transactions were made to report. Fortunes have been made or lost in less time.

The latest high-profile insider purchase to draw attention in a down market is that of Bank of America Corp. chief executive Ken Lewis, who spent more than $2 million buying 400,000 shares of his struggling bank in late January and early February.

So far, so good. Bank of America shares climbed back above $6 on Wednesday, well above Lewis' purchase price of about $5.40 per share.

These stories frequently have unhappy endings, though, for investors who try to emulate an insider's buys.

Take the case of Krispy Kreme Doughnuts Inc. Two days after the company reported its first-ever loss in May 2004, CEO Scott Livengood bought 24,000 shares at $20.77 in an apparent show of confidence. His total cost: More than $498,000, almost equivalent to a year of his salary.

Some investors believed that was a promising sign of better things to come, at a time when overexpansion and changing dietary habits had both hurt results and the stock price had been cut in half in a matter of months.

But if you bet dollars to doughnuts on it being a strong buy signal, you'd have been very wrong. Eight months of continuously bad news followed -- including plunging profits, a federal securities investigation and allegations of corporate deceit -- Livengood was out as CEO and the stock price was under $9. Today each share is worth just over $1.

Similarly, Dell Inc. CEO Michael Dell bought $100 million of the computer maker's stock last September.

Talk about bad timing. The shares lost more than half their value in 10 weeks during the market meltdown. As of this week Michael Dell had lost $55 million on the investment.

A wildly unpredictable economy like this one, in other words, makes it even harder to interpret the significance of insider transactions.

"When you see an executive put large sums of money on the line, clearly that's a signal that he feels very confident," said Jason O'Donnell, a senior research analyst with Boenning & Scattergood Inc. in West Conshohocken, Pa. "But that doesn't necessarily mean that the stock's going to go up."

While it's hard to imagine that a $100 million stock purchase like Dell's was simply window dressing or a statement to investors, it's possible that smaller purchases could be aimed largely at drumming up more buying.

Vita Nelson, editor and publisher of The MoneyPaper, a Rye, N.Y.-based financial newsletter, says executives could be playing off the widespread notion that insiders have an early read on where the company is going.

"They may hope that the publicity of their having bought will have a positive effect on the direction of the market price," she said.

Other reasons to be wary of insider purchases: They could be happening because of company requirements that require C-level executives to own a certain amount of shares. They could have been made with company loans -- check the company's SEC filings. Or the executives could just be putting company-awarded stock options to work, which would signify less of a personal commitment.

Savvy investors will view a CEO's big buy in context.

Lewis, for example, made more than $20 million in 2007, so a $2 million purchase was the equivalent of roughly a month's pay -- substantial but not exactly betting the ranch. On the other hand, he was joined by more than a dozen Bank of America officers and directors who made large purchases at the same time -- a collective vote of confidence rather than an individual one.

Insider sales should be viewed with similar caution. An investor's instinct when a top executive sells thousands of shares would be that the stock price is heading lower and it's time to follow suit. But the executive could also be selling because she needs the cash for personal reasons.

One good overall indicator is how much of a stake insiders have in their companies. In general, the more shares they own, the better for investors. So if they are selling large percentages of their overall holdings, that could be a stronger signal to jump ship.

But don't drive yourself crazy trying to assess the meaning of a big transaction if the evidence seems mixed. It's best not to view insider moves in isolation, advises Wayne Thorp, a financial analyst for the American Association of Individual Investors in Chicago.

"You're building a mosaic to decide whether you want to be invested in a company," said Thorp. "This is just one piece of the puzzle."

Securities and Exchange Commission http://www.sec.gov

http://finance.yahoo.com/news/Follow-the-leader-Insight-apf-14325813.html;_ylt=AuU4A5xCJXZ4MquWq6DJEaC7YWsA