The Rude Awakening
Wall Street, New York
Tuesday, May 16, 2006 ------------------------- - Whispers in the hall - How to get the inside run and
follow the smart money of those in the know,
- A small cap rampage leaves the big boys floundering
in the wake,
- The data from yesterday's market carnage, your seat
at the insider's boardroom table and much more...
------------------------- [Joel's Note: A couple of weeks back we brought you a
column by small-cap specialist, James Boric, with the
promise that we would do two things: 1) Get him back for
some more small-cap insight and, 2) Let you know when he
released his Small Cap Insider trading service the moment
it was available. Today we give you both. Below, Mr. Boric gives you the inside run on insider
buying. Read on for the fulfillment of promise one...Stay tuned for two.
-------------------------- Your Secret Connection to the Insiders
By James Boric Imagine if every time you bought a stock, you knew exactly
what the company's CEO, CFO, board of directors and even
its legal team thought about its future. Maybe the CEO
would pull you aside and say, "Listen, next quarter is
going to be a big one. We just landed a multi-million
dollar contract with a brand new client. When Wall Street
finds out about it, our stock will double." If you had this
kind of "insider information" you'd be rich, right? You'd
always know what to invest in and when. There is no limit
to the money you could make. The only problem is, you don't have access to a company's
top management on a daily basis. And even if you do, they
SEC prohibits them from doling out such crucial
information. Stinks doesn't it? Well, there is a way to know what the insiders are thinking
before you ever buy another stock. Thanks to Section 16 of the Securities Exchange Act of
1934, insiders are obligated to reveal any trading of
company shares by the 10th day of the month after they
bought or sold their company stock by filling out something
called a "Form 4." On these Form 4s, the insider is required to disclose how
much stock he bought, at what price and when he bought it.
This is all crucial information. And you have access to it
all. By scouring the market's Form 4s everyday, you can know
exactly what stocks the insiders are bullish on. You can
know exactly where the so-called "smart money" is betting
the highest returns will be. And you can put yourself in
the best position for outstanding returns. By the way, financial sites like Yahoo! Finance,
investor.com and morningstar.com all have an "insider
transaction" link you can click on to see if insiders in
any given company are buying or selling stock. These sites
simply download information from the Form 4s and publish it
for their readers. So it sounds simple. Everyone with access to the Internet
can be on top of what stocks the insiders are loading up on
thanks to these Form 4s and financial Web sites. That's the
good news. The bad news is, it's not as easy as it may seem to
decipher the insider transactions you see on the Form 4s or
the financial Web sites. For starters, there are hundreds (if not thousands) of
insider transactions reported in a given day. So it would
literally take you ALL day to go through them. And even
then, you have to know what to look for. Unfortunately, not
all insider activity is useful -- even the reported "buys."
Many times an officer or manager in a company receives
stock options as part of his compensation package. These
options can total in the millions of dollars. And every
time a CEO cashes in on an option, he must file with the
SEC using a Form 4. With that in mind, you may pull up a Form 4 and see what
looks like a whole lot of insider buying by a CEO or CFO in
a company. But in reality, he isn't using his own money to
buy stock in his company. He is simply using his options he
was given by the board of directors to "cash in." This is not the kind of insider buying you want to look
for. You want to look for the stocks that the insiders are
loading up on with their own money -- and enough of it that
they would feel the pain if they lost out. Another mistake many novice investors make is they bite at
the first hint of insider buying. For instance... If one insider buys a few shares of stock in his company,
the last thing you want to do is blindly buy that stock as
well -- especially if the insider only put a small amount
of money down and several other insiders are selling when
he is buying. Between 1958 and 1976 five prominent insider-buying studies
were published by Rogoff, Glass, Devere, Jaffe and Zweig.
They all wanted to show how much money you could make by
buying the same stocks the insiders bought – shortly after
they laid their money down. In each study these gentlemen followed two hard and fast
rules. First, there had to be more than one insider buying
stock in the company – known as "cluster buying". And
second, the number of purchases had to significantly exceed
the number of sell transactions. By following these rules,
they were able to beat the market by a 2:1 margin.
Here are three rules you should remember if you're looking
at insider buying: Rule No. 1: There must be a cluster of buying by the
insiders. That means at least two different insiders must
be buying at about the same time. And it should not just be
directors (who tend to be paid in company stock in addition
to a salary). We're looking for top management putting up
their own money. Rule No. 2: The total number of buy transactions must
significantly outnumber the total sell transactions.
Rule No. 3: The insiders must lay down a significant amount
of their own money in the stock. And actually, there is a
fourth rule that should seem glaringly obvious to you...
Everyone knows that small-cap stocks have dominated the
market -- outpacing the large caps in each of the last
seven years. But what many investors may not realize is
that this is NOT a fluke. Historically, small-cap stocks
have always led the market. In a famous study conducted by Ibbotson Associates in the
1990s, they found that small-cap stocks outperformed all
other stocks 56% of the time -- including the blue chip
stocks that get all the media's attention -- between 1926
and 1996. The average return in any given year was 14% for
small-cap stocks. It was just 9% for large caps. And the
longer you held your small-cap stocks, the better off you
were. Since 1926, there has NEVER been a period of 25 years or
more where investing in large-cap stocks has proven more
lucrative than investing in small-cap stocks. Of course,
there are many reasons for the large small-cap returns. 1) There are a lot more small-cap companies on the market.
About two-thirds of all the companies on Wall Street have a
market cap of $1.5 billion or less. So as a small-cap
investor, you have a much wider universe to find
moneymaking opportunities. 2) Because there are so many small-cap companies, the major
brokerage firms and institutions don't have enough analysts
to cover them all. So they simply ignore some of the
fastest-growing companies on Earth. As a result, there are
some tremendous companies trading for virtually nothing.
And over time, all good bargains get discovered. We look
for them before that discovery happens. 3) Good small-cap companies can adapt to the changing
marketplace and react quicker than their larger, stodgier
large-cap peers. They are nimble. 4) Simple math tells you that it is a lot easier for a $200
million company to double than it is for a $255 billion
company to do the same. Net-net, if you combine the explosive small-cap market with
the insider-buying strategies I talked about earlier, you
put yourself in a great position to identify the stocks
market's very best up-and-comers. [Joel's Note: Later today, James is going to release his
brand new Small Cap Insider alert to selected readers.
Being a Rude reader, you are entitled to some of the first
seats at the insider's boardroom table. Find out who has
enough confidence in their won company to put their own
money where there mouth is. Keep an eye out today for an
investment alert you will not want to miss. The Small Cap
Insider will be released today...stay tuned.
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-------------------------
Did You Notice? Insiders Hit the Bid
By Eric J. Fry
Insider-buying: Good
Insider-selling: Bad…especially when lots of insiders are
selling at the same time.
The chart above presents the ratio of insider-buying to
insider-selling across the broad stock market. Clearly,
over the last few years, corporate insiders have become
increasingly persistent sellers of their own companies'
shares. These folks-in-the-know are now selling about 5
shares for every one they buy – that's a multi-year low.
If so many insiders are selling, should we outsiders be
buying?
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