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VERSACE: For insight, look to insiders

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ANALYSIS/OPINION:

Investors watch a number of things as they look for assurance on their current investments, as well as when they try to identify potential new ones.

From industry and company analyses to revenue and earnings growth to examining current and past valuations to determine potential value of a security to deciphering a company's balance sheet, there are a number of fundamental checks that an investor needs to scrutinize. Some investors favor technical analysis, which hinges on examining a stock's price chart amid a number of price trend indicators to determine potential entry and exit points.

The reality is there is no silver bullet, and savvy investors use a number of tools collectively to get an accurate picture. That said, some are leading indicators while others are lagging, and amid the current economic environment, investors are examining leading indicators to determine what is coming next.

Over the last few weeks a number of companies - Procter & Gamble, Best Buy Co., O'Reilly Automotive Inc., AK Steel Holding Corp., FedEx Corp. and others - have warned of weaker than expected results or adjusted their outlook in a downward fashion. Others, like Family Dollar Stores Inc. just this week, have missed forecasts set by Wall Street expectations. This combination, along with slowing economic indicators at home and abroad, has investors concerned about the earnings season that will be upon us in just a few weeks.

One leading indicator that I and others watch - and especially so in times like these - is insider activity, which refers to the buying and selling activities of stocks and securities by company insiders, such as key executives and board members.

Generally speaking, I'll watch open-market buying and selling, tracking the name of the insider, their relationship to the company, how many shares were traded and at what price. The reporting form, known as Form-4, also gives the dates of an insider's trades; total holdings of the insider after the transactions; and if they were made on the open market, trades related to the exercise of stock options or some other special reason. Another advantage of Form-4 is that it must be filed with the SEC within two business days, which makes it as close to a real-time indicator as one could hope for.

In terms of tracking insider activity, Yahoo Finance does a good job, as does InsiderInsights and Insider Monitor. One of the drawbacks to insider activity information on Yahoo Finance is that you need to know the company in advance, while InsiderInsights offers not only that capability but tracks which companies are filing Form-4s. Insider Monitor goes one step further and tracks the top 10 insider officer buys and sales of the week and the month.

Both insider selling and insider buying are worth watching, but in terms of looking for reasons to say no given the current environment, insider selling is the more useful indicator. As the Wall Street logic goes, why should I be buying the shares when insiders are selling?

So what's been going on in terms of insider selling over the last few weeks? Heaving over to Insider Monitor, we find that through June 22, there has been significant insider selling over the last month at companies like information and insight vendor IHS Inc.; FleetCor Technologies, Inc., a global provider of specialized payment products; specialty retailer The Fresh Market Inc., that focuses on perishable goods; Monster Beverage Corp.; AutoZone Inc.; and others.

Looking at the moves in these stocks over the last month or so, all of them (with the exception of IHS) are down 8 percent to 11 percent. Generally speaking, when there is a diverse number of insiders selling shares in size, it's a red flag that I tend to heed, and so should you.

Turning to those companies that have seen significant insider buying over the last month, we quickly notice that insider buying has been far less robust compared to insider selling. And at companies that have seen insider buying, the diversity among those insiders who are buying has been limited.

Seems to me insiders are just as concerned about the upcoming earnings season as ordinary investors are.

Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com, or follow him on Twitter @_chrisversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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About the Author
Chris Versace

Chris Versace

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 ...

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