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VERSACE: Data points can guide investors
As I have written in previous columns, investors need to examine a number of data points as they review existing investments and ponder new ones.
Those data points range from those that are economic in nature to new products and trends to management commentaries and the like as well as keeping our eyes on financial metrics and valuations. While these tend to be the brunt of what we look at, and I say that bearing in mind that this already is a lot of information to keep up on, there are other indicators to watch for, such as insider-trading activity.
Because insiders have an insight into the workings of their company, it may be wise for an investor to look at these reports to see how insiders are legally trading their stock. Before we get to what insider activity is, let's make sure we know what insider trading is. The term actually includes both legal and illegal conduct.
The legal version is when corporate insiders -- officers, directors and employees -- buy and sell stock in their own companies. Illegal insider trading refers to buying or selling in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped" and trading by those who misappropriate such information. It is illegal when the material information is still nonpublic because trading while having special knowledge is unfair to other investors who don't have access to such knowledge. Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors.
The kind of insider trading that I use as a data point while investing is the legal trading by corporate insiders. We all have access to this type of insider trading because the Securities Exchange Commission (SEC) requires all corporate insiders to report their trading activity. I've tracked this type of insider trading in the past as a supplemental indicator when deciding to either buy or sell a stock position in a particular company.
One such example is J Crew. From April to May 2008, Tracy Gardner, who was and is president of J Crew Retail and Direct, sold more than 100,000 shares of J Crew, according to SEC filings. At the time I was concerned about the state of the economy and the consumer, much the same was I am now, and I viewed Ms. Gardner's actions only at face value. As head of J Crew Retail and Direct efforts, she was selling stock during a permissible period. I sold mine as well and before too long J Crew shares fell from a high of $48.68 on May 9, 2008, to a low of $9.05 in November of the same year.
To be fair, I am not trying to single out Ms. Gardner and I had a number of other reasons to be concerned about J Crew shares, given their competitive position and price points amid a slumping economy and what I suspected at the time to be consumer retrenchment amid rising employment concerns. The point, however, was by watching insider activity we can glean a feel for what management is thinking about near- and medium-term prospects for the company's business.
In general, and all things being equal, most professional investors would prefer buying shares in a company when insiders are buying and selling when insiders are selling.
One firm that tracks insider selling is TrimTabs Investment Research, a provider of supply and demand data on equities and cash available for investment. According to TrimTabs, insider selling in August was significant. How significant? TrimTabs said insider sales equaled $6.3 billion for the month, compared to only $210 million in insider buying. Whipping out a basic calculator and doing some sandbox math, we find this yields a ratio of insider selling to buying of 30-to-1. Now, that was the data for the entire month of August. What was more alarming to me was the trend toward the end of August, when the ratio of insider selling-to-buying doubled in the last week to 61.8-to-1. That is a horrific statistic that makes me wonder how robust the economic recovery will be in the near term. Just because the economy has hit bottom does not necessarily mean it is about to recover.
Some ways for the individual investor to keep tabs on legal insider trading trends is to peruse filings with the SEC, read more than a few financial magazines and Web sites, and look for some statistics. In terms of statistics, Yahoo Finance offers company specific insider trading details while MSN Money offers a top 10 of insider purchases and insiders sales. Some of the most recent top 10 insiders sales per MSN Money include Viacom, RailAmerica, E-Trade, Nike and Carnival Corp.
Is that enough to make me sell a position if I had one? No.
Does it make me raise my eyebrow and wonder what is or is not going on? Sure it does. But remember, multiple data points are needed to have a sound investment thesis, whether it's to buy a stock or sell one.
• Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston. He can be reached at email@example.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.
About the Author
Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
By Donald Lambro
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