Bet on Greed

Som

e corporate executives can't be relied on to look after the interests of workers or shareholders, as the scandals, from Enron to Tyco to WorldCom, have made clear. But you can trust the top dogs to look after their own pocketbooks. So when groups of execs spend their cash on shares of the companies they run, it's a reliable sign that they expect good things down the road — and it may be time for you to tag along.

Watching insiders became even more useful this month, thanks to new disclosure rules requiring top corporate officers, board members and majority shareholders to report to the Securities and Exchange Commission within two days of buying or selling their company's stock. The old rules gave these insiders as many as 40 days.

By some measures, insider activity hasn't been this bullish in five years. Insiders sold $882 million in stocks in July, the first month since 1997 that they haven't unloaded at least $1 billion, reports Thomson Financial. And buying has picked up, jumping 17% in July to $143 million. As those numbers show, executive sellers still far outnumber executive buyers. But that's almost always the case. Executives get so much stock as part of their compensation that they don't have to buy, and selling can amount to nothing more than prudent diversification or raising cash for a new vacation home or museum wing.

Kevin Schwenger, who tracks insider activity for Thomson, says insider selling typically runs $10 to $20 for every $1 of insider buying. The current reading: $6.15 to $1, "a very bullish signal," says Schwenger. David Coleman, editor of Vickers Weekly Insider Report, reaches the same conclusion. He focuses on numbers of shares traded, not dollars. In the first part of June, his weekly ratio of shares sold by insiders to shares bought by them hit a 15-year high of 4.2 to 1 but has since fallen to about 1 to 1, a rare episode of parity last seen immediately following Sept. 11, 2001. When insiders buy more than they sell, as Coleman believes will be the case in coming weeks, the market becomes compelling. This buy signal was seen after the 1987 crash, the 1991 Gulf War and the 1998 Asia crisis — and in each case, the Dow soared soon afterward.

Insider activity may offer buy and sell signals on individual stocks, though investors should never follow insiders blindly. Sometimes executives buy just because they want to get Wall Street's attention or they misread the market. They also tend to act far in advance of expected news, in part to avoid the appearance of illegal insider trading. So patience is key. New research by Bin Ke and Steven Huddart of Pennsylvania State University and Kathy Petroni of Michigan State suggests that insider activity precedes specific company news by three to nine quarters. The current buying, then, may preface gains that won't come before next year.

Insider activity is most telling when three or more executives take part and those execs reverse the most recent trend. Consider Lucent Technologies. Five insiders, including ceo Patricia Russo, bought 1.6 million shares in August. There had been no insider buying in the previous nine months and much selling not long before that — a bullish pattern found now in a range of beaten-down tech and financial stocks such as Nortel, Computer Associates, J.P. Morgan Chase and Capital One Financial. Homebuilders like NVR and health-care companies such as HCA have seen a pickup in selling. Insider activity is getting easier to research on websites like Thomsonfn.com (go directly to insider.thomsonfn.com/tfn/insider.asp?imodule=db&ticker=hca&ttype=A) and MSN.com (go directly to moneycentral.msn.com/investor/invsub/insider/trans.asp). Take a peek, and trust that the big boys have their own interests at heart.