Insider Buying and Management Stock Options Can Signal Opportunity

In their search for complete information on businesses, investors often overlook one very important clue. In most instances no one understands a business and its prospects better than the management. Therefore investors should be encouraged when corporate insiders invest their own money alongside that of shareholders by purchasing stock in the open market.

It is often said on Wall Street that there are many reasons why an insider might sell a stock (need for cash to pay taxes, expenses, etc.), but there is only one reason for buying. 

Investors can track insider buying and selling in any of several specialized publications, such as Vickers Stock Research.

The motivation of corporate management can be a very important force in determining the outcome of an investment. 

• Some companies provide incentives for their managements with stock-option plans and related vehicles.  Usually these plans give management the specific incentive to do what they can to boost the company's share price. 
• While management does not control a company's stock price, it can greatly influence the gap between share price and underlying value and over time can have a significant influence on value itself. 
• If the management of a company were compensated based on revenues, total assets, or even net income, it might ignore share price while focusing on those indicators of corporate performance.
• If, however, management were provided incentives to maximize share price, it would focus its attention differently. 

For example, the management of a company whose stock sold at $25 with an underlying value of $50 could almost certainly boost the market price by announcing a spinoff, recapitalization, or asset sale, with the result of narrowing the gap between share price and underlying value. The repurchase of shares on the open market at $25 would likely give a boost to the share price as well as causing the underlying value of remaining shares to increase above $50.

Obviously investors need to be alert to the motivations of managements at the companies in which they invest.

Insiders buying more of their own stock is a bullish signal

There are thousands of reasons for insiders to sell stock, but there's only one reason they'll buy:  They think the stock is going to go up.

After all, insiders know more about their company than outside investors ever could.  If they're buying, there's probably a pretty good reason for it.

Past studies bear this reasoning out.  They show that insider-buying is a bullish signal at both the company-specific and macro-market levels.

Director who engaged in insider trading walks free

LEONIE WOOD

April 17, 2010

JOHN Francis O'Reilly, a former director who pleaded guilty to insider trading, has averted jail after a judge said the businessman's judgment was ''clouded'' at the time and the nature and value of the shares he traded did not mark the offence as particularly serious.

In sentencing O'Reilly, Justice Terry Forrest of the Victorian Supreme Court said the former Lion Selection director had obtained only a ''modest'' $29,045 profit from his purchase and sale of 50,000 Indophil Resources shares in mid-2008.

The judge said that while the most troubling aspect of O'Reilly's conduct was that he traded shares as a ''true insider'' - from inside the boardroom - he acknowledged that O'Reilly conducted only one trade and did not embark on a sustained course of trading.

O'Reilly was convicted of one count of insider trading. Justice Forrest imposed a jail sentence of 10 months and then wholly suspended the term, allowing O'Reilly to walk free. Justice Forrest said that but for the guilty plea, O'Reilly would have been sentenced to 13 months' jail and ordered to serve a minimum of five months.

O'Reilly must be of good behaviour for 18 months and pay a $500 bond. The court also imposed a $30,000 pecuniary penalty on top of the $61,600 that O'Reilly must forfeit under the Proceeds of Crime Act. O'Reilly bought $38,880 of Indophil shares in May 2008, when he was privy to confidential information as Lion negotiated to sell its 25 per cent Indophil stake to Xstrata - a move that would trigger a takeover of Indophil and send its shares higher.

''By your conduct you have misled your fellow directors, acted in contravention of Lion's security trading policy, misled your shareholders and the Australian Securities Exchange, and undermined the integrity of the securities market,'' Justice Forrest said yesterday.

He said the ''objective gravity'' of O'Reilly's offence emerged after considering that, as a director, O'Reilly was a ''true insider'', but he did not try to conceal the trading through secret or nominee accounts. This ''relative lack of sophistication'' suggested ''that your judgment was clouded at this time'', the judge said.

''Thirdly, I do not regard the nature of the trade, the amount invested or the anticipated profit as falling into a particularly grave or serious category. You did not seek to multiply your anticipated profit by choosing an exotic method of trading, nor did you invest a really large sum of money.''

Justice Forrest said he considered it a ''mid-range example of a serious offence'' and accepted O'Reilly's conduct was ''an aberration''.

Ian Ramsay, director of Melbourne University's Centre for Corporate Law and Securities Regulation, suggested the sentence appeared ''relatively modest'' considering several earlier insider trading cases had attracted jail or periodical detention sentences.

Professor Ramsay argued that the number of insider enforcement actions in Australia and the penalties tended to be ''relatively light'' compared with overseas.

''I actually think the Australian insider trading law is a mess in some respects,'' he said. In some ways it was too broad, he said, adding: ''You could be an insider by picking up a piece of paper on Collins Street.''

And in other areas, the legislation was too proscriptive.

''What you do come to quickly, though, is the realisation that courts typically do not impose terms of imprisonment for offences under the Corporations Act,'' he said.

Source: The Age

http://www.smh.com.au/business/director-who-engaged-in-insider-trading-walks-free-20100416-skmy.html

What to do when insiders sell

GREG HOFFMAN

March 22, 2010 - 1:19PM

CSL's McNamee sells down. Should you?

Last week, CSL chief Brian McNamee announced the sale of $8.4 million worth of his shares in the company, amounting to about one sixth of his total holding. There is no doubt that this is a significant sale. How CSL shareholders interpret its significance is less certain.

At times I have regretted not following the insiders' moves after holding on to my stock. Equally, there have been occasions where the share price has surged after sales like McNamee's. There is simply no clear-cut rule to follow when an insider in a stock you own disposes of a large parcel of shares.

But there are two key questions to ask when considering such sales, the answers to which might provide some guidance for you:
1. Is the stock expensive?
In January 2008 The Intelligent Investor published an analysis of then-darling stock Reverse Corp (which offers the 1800-REVERSE service). Our analyst noted the combination of an expensive-looking stock price and sales by founder and executive director Richard Bell. We suggested investors steer clear and shareholders follow Bell's lead. The stock price is now down 95%. But how does CSL fare on this score?

Coincidentally, the same analyst who pulled apart Reverse Corp also covers CSL for The Intelligent Investor. Almost two years to the day after issuing his negative view of Reverse Corp, he recommended CSL to our members at $31.30 per share.

That price, Nathan Bell explained, was ''reasonable for such a high quality business''. Even though CSL shares have risen by 15% since January, we don't believe the overpriced condition applies in this case.

2. Is this a series of sales by the same director or, more importantly, sales by multiple directors?
Between October and December 2007 we noted nine sales by six individual directors of Roc Oil, at prices between $2.95 and $3.43. The share price today stands at 36 cents.

In CSL's case, the previous director sale came from Ian Renard in August last year. To find the next most recent sale, you have to go back to McNamee's previous sale in April 2007.

To me, this record is clean enough. McNamee is not a serial seller (at least, not yet) and nor are his fellow directors.

When looked at in this light, McNamee's sale shouldn't send waves of panic through CSL's share register.

But insider sales should always be taken seriously, even if they don't necessarily prompt a sale in your own portfolio. Director sales are not always a bad sign but they're never a good one. To wit, if you've had your CSL shares in the bottom drawer for a few years, it may be time to move them a little closer to hand and follow the story a little more carefully.  

If you're interested in following share purchases and sales, the free site Directors' Transactions (run by The Intelligent Investor) is designed to help you do exactly that.

Greg Hoffman is research director of The Intelligent Investorwhich provides independent advice to sharemarket investors

http://www.smh.com.au/business/what-to-do-when-insiders-sell-20100322-qq13.html