Investment Tip-Offs from Management
Egodigwe, Laura, Black Enterprise
Here are 4 ways executives let you know business is good and company stocks may be headed upward
PSST. WANT A HOT STOCK TIP? LOOKING for the scoop on what's going on in the corporate boardroom? You'll be surprised to know that company officials from Maine to Mexico are slipping investors inside information daily, literally cluing in everyone and their neighbor on how things are at corporate headquarters.
No, we're not talking about the kind of stuff that got Michael Milken and Ivan Boesky outfitted in striped suits (and we're not talking pinstripes, either). High jinks of that kind--trading on company-specific stock information not publicly available to amass huge profits--are not only strictly forbidden by the Securities and Exchange Commission, they'll likely land you behind bars.
But there are legal ways for you to get in on the action. Experts will tell you that companies tip investors off constantly. Know the signs, they say, and you'll know the many ways to profit in the stock market.
Start with insider buying and selling. The law allows corporate executives to trade shares all the time. Top executives from the chairman down can buy or sell their company's stock by exercising options or swapping shares for cash on the open market, just as long as they tell the SEC what they're doing. And, these same SEC records are available to all comers. Follow management's trades, and you'll have a pretty good idea of what they know and where they think their stock is heading.
That's not all. There are a number of other signs savvy investors can use to peek into the minds of the head honchos. Stock splits, buybacks and dividend increases all send a message to the market, one that is often good to heed. And to top it all off, the information is legal, and readily available to investors with just a minimal amount of work. Here, then, is how to put your ear to the ground and your portfolio to work.
TIP #1: INSIDER TRADING
It's only logical that the folks at headquarters will have a pretty good idea of what's going on at their company. They're swapping memos daily. They're keeping an eye on the competitors. They're looking up and down at sales and profit figures all day.
Within the limits of the law, those same insiders--officers and directors--rely on much of that in-depth knowledge when they buy or sell company shares. If business is good, you're likely to see them snapping up their stock. If things look rocky or if their stock looks a little overpriced, it's not uncommon to see the same well-informed officials selling shares.
In fact, insider buying is such a strong signal that some money managers say they won't invest in a stock unless they see management actively investing in its own company's shares. That's because bosses, even those raking in six- and seven-figure salaries, are strangely like the rest of us: they're not investing to lose money. And executives stocking up on their company's shares aren't merely looking for their investment to appreciate--they're in a position to help it do so.
That's important for Edgar Lomax Value Fund portfolio manager Randall Eley. Eley may use a good many criteria when he screens the market for stocks, but at the end of the day he likes to see insider ownership as high as 3%-4% in large-cap companies and 10% or more in smaller companies. "Management then has to think like owners and concentrate on enhancing value for all shareholders," he says.
Look at the market and you'll see that a number of stocks have moved up after their management purchased shares. Last year, laboratory equipment maker Beckman Coulter (formerly Beckman Instrument) (NYSE: BEC) was under pressure, and its stock sank as low as $38 a share. Even though the company stock had a bad case of the doldrums, executives weren't fazed: many bought up shares with a vengeance. More importantly, as the stock rose in value to the $40s earlier this year, the same group of bosses continued to buy aggressively. …