Todayâs Subject:
Entering the Long Stock Trade â Overview: Why ORCL, and Why Now? (Part 5) Potential Impact of Purchase (or Sales) by Insiders.
For ORCL, the insider activity had been a mixed bag prior to March 9, 2004, but it is important to understand the kinds of insider activity that occur and how best to interpret it. Just as interpreting the news is a bit more art than science, so also is the interpretation of insider activity. By the way, this insider activity IS PUBLICLY AVAILABLE, NOT from non-public sources, which is strictly forbidden by the United States Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD).
A good place to learn about the forms of insider trading is http://help.yahoo.com/help/us/fin/research/research-13.html
Basically, an insider can be a corporate officer, an affiliated person of that officer (a wife, relative, etc.), or someone who controls 10% or more of the outstanding shares of a given stock. The SEC requires that forms be filled out on a routine basis to report the purchase and sale of stock in a given company. That information becomes public the moment it is filed, most times, on the same day or very close to the same day that it is registered and recorded according to SEC rules.
I tend to believe the following, based on my experience:
1) Confirmed insider BUYING is actually more important than insider SELLING. The reason for that is pretty simple. Officers and affiliated persons are not much different that you and me. If they feel the prospects for the firm are good (and they should if they are running the company well), these individuals are going to buy their stock, and hopefully hang onto it for as long as possible. I will show a specific example of this in another Swing Traderâs Almanac. Why is selling not as important? For at least two reasons:
A) Some officers will sell stock when options are exercised. For the officer, that is money in the bank for a job well done. This has no bearing on their feelings about the company, but this officer just might want to diversify his holdings, buy that new house, or whatever meets the needs of that particular officer or insider.
B) Sometimes, officers retire, and decide to liquidate holdings as another source of income, which would require them to sell and re-invest in other ways. It is not an indictment of the company in any way.
Basically, if insider buying is material at some point near a pivot or reversal point of a pattern, and I see multiple insiders BUYING, it is a confirmation that things are OK, and itâs another plus in the plus column for being long the stock.
2) The only time I get concerned about insider SELLING is when I see an en masse exit of insiders who sell MORE than 50% of their holdings in a stock. It doesnât happen a lot, but it DOES happen. If one sees a large cropping of insiders reducing their holdings by half, it is, at least to me, a big red flag. Again, this is subject to interpretation, but one must take a look at this in light of any potentially negative news about the shares of a given company.
How does this impact ORCL? Well, prior to and including March 9-10, 2004 there was insider selling about 6 months after announcement of the PeopleSoft acquisition (January 2004), but only one of the insiders sold more than 50% of their holdings at that point. (See http://moneycentral.msn.com/investor/invsub/insider/trans.asp?Symbol=ORCL)
(Later, we will discuss what one important insider did AFTER the trade was put on, but that will be for another session when we evaluate the trade, and it did temporarily influence the trade AFTER THE FACT).
This did not raise a red flag with me at the time(March 9-10, 2004). Up to this point, the insider activity was not a pivotal factor influencing this trade. This wonât be true of every trade, but it was not in this one.
Anatole France is quoted as saying âAn education isnât how much you have committed to memory, or even how much you know. Itâs being able to differentiate between what you do know and what you donât.â
Interpretation of insider trading is a good example of what Anatole France meant. Being able to differentiate between noise and serious insider activity is helpful in understanding if there is a potentially strong trade or just another good opportunity.
In future issues of Swing Traderâs Almanac, I will attempt to help you add to your discernment.
Entering the Long Stock Trade â Overview: Why ORCL, and Why Now? (Part 5) Potential Impact of Purchase (or Sales) by Insiders.
For ORCL, the insider activity had been a mixed bag prior to March 9, 2004, but it is important to understand the kinds of insider activity that occur and how best to interpret it. Just as interpreting the news is a bit more art than science, so also is the interpretation of insider activity. By the way, this insider activity IS PUBLICLY AVAILABLE, NOT from non-public sources, which is strictly forbidden by the United States Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD).
A good place to learn about the forms of insider trading is http://help.yahoo.com/help/us/fin/research/research-13.html
Basically, an insider can be a corporate officer, an affiliated person of that officer (a wife, relative, etc.), or someone who controls 10% or more of the outstanding shares of a given stock. The SEC requires that forms be filled out on a routine basis to report the purchase and sale of stock in a given company. That information becomes public the moment it is filed, most times, on the same day or very close to the same day that it is registered and recorded according to SEC rules.
I tend to believe the following, based on my experience:
1) Confirmed insider BUYING is actually more important than insider SELLING. The reason for that is pretty simple. Officers and affiliated persons are not much different that you and me. If they feel the prospects for the firm are good (and they should if they are running the company well), these individuals are going to buy their stock, and hopefully hang onto it for as long as possible. I will show a specific example of this in another Swing Traderâs Almanac. Why is selling not as important? For at least two reasons:
A) Some officers will sell stock when options are exercised. For the officer, that is money in the bank for a job well done. This has no bearing on their feelings about the company, but this officer just might want to diversify his holdings, buy that new house, or whatever meets the needs of that particular officer or insider.
B) Sometimes, officers retire, and decide to liquidate holdings as another source of income, which would require them to sell and re-invest in other ways. It is not an indictment of the company in any way.
Basically, if insider buying is material at some point near a pivot or reversal point of a pattern, and I see multiple insiders BUYING, it is a confirmation that things are OK, and itâs another plus in the plus column for being long the stock.
2) The only time I get concerned about insider SELLING is when I see an en masse exit of insiders who sell MORE than 50% of their holdings in a stock. It doesnât happen a lot, but it DOES happen. If one sees a large cropping of insiders reducing their holdings by half, it is, at least to me, a big red flag. Again, this is subject to interpretation, but one must take a look at this in light of any potentially negative news about the shares of a given company.
How does this impact ORCL? Well, prior to and including March 9-10, 2004 there was insider selling about 6 months after announcement of the PeopleSoft acquisition (January 2004), but only one of the insiders sold more than 50% of their holdings at that point. (See http://moneycentral.msn.com/investor/invsub/insider/trans.asp?Symbol=ORCL)
(Later, we will discuss what one important insider did AFTER the trade was put on, but that will be for another session when we evaluate the trade, and it did temporarily influence the trade AFTER THE FACT).
This did not raise a red flag with me at the time(March 9-10, 2004). Up to this point, the insider activity was not a pivotal factor influencing this trade. This wonât be true of every trade, but it was not in this one.
Anatole France is quoted as saying âAn education isnât how much you have committed to memory, or even how much you know. Itâs being able to differentiate between what you do know and what you donât.â
Interpretation of insider trading is a good example of what Anatole France meant. Being able to differentiate between noise and serious insider activity is helpful in understanding if there is a potentially strong trade or just another good opportunity.
In future issues of Swing Traderâs Almanac, I will attempt to help you add to your discernment.
