Which way are the big dudes going?

Friday 1st June 2001

Following insiders' trades can be a good way to get rich - if you can find them

How's this for some fascinating information? In February, US corporate insiders - directors, senior executives and the like - sold 29 times more of their companies' stock than they bought. That's $US4.2 billion sold, versus $US144 bought. That's a lot of selling by insiders. What should that tell you as an ordinary punter? According to one Fortune magazine commentator, it means: "Get out as fast as you can!"

Okay, because US executives get given so many stock options, there are always more sellers than buyers. But it's usually an average of 12:1. Experts say present levels of insider share dumping are unprecedented, at least in the last 10 years. And given that insiders mostly make money on their trades (they have the insider nous, after all), those insider figures give a pretty good indication of what other investors should be doing.

That's pretty interesting stuff. You could impress your dinner guests with it, if nothing else. But wait, there's more! You can also get information about which insiders are buying and selling what US stocks. Research companies like InsiderTrader.com can crunch the numbers. For example, in February Bill Gates sold 2.9 million of his Microsoft shares at between $US60 and $US63. Four senior AOL Time Warner executives also sold shares or exercised options when stock was between $US45 and $US50 a share. Both stocks continued to slide for another couple of months, though they had rallied as Unlimited went to press.

The moral of the story is that as a small shareholder, you can get some indication of what you should be doing with your portfolio by keeping a close eye on what the people in the know are doing with theirs.

If you own US stocks, that is.

In New Zealand, it's much more difficult. Information about insiders' trading isn't freely available - and there certainly aren't any outside bodies analysing what insiders are doing. But at a time when the swings on stock markets all round the world are increasingly hard to predict, wouldn't it be great information to have? We thought so, and tried a couple of avenues.

First, the New Zealand Stock Exchange's list of substantial shareholder notices. Under Securities Commission rules, those who own more than 5% of a company must tell the stock exchange if they buy or sell shares, but only if the portion bought or sold amounts to at least a further 1% of total stock. This supposedly prevents major shareholders secretly selling out, usually because bad news is on the way. Trouble is, when we got David McEwen, investment advisor and author of McEwen's Investment Report (www.mcewen.co.nz), to examine the substantial shareholder notices for the first four months of this year, he found very few of the 40 transactions filed by existing shareholders involved company insiders. Because of the thresholds, few directors' transactions would be in that league.

An additional problem, McEwen notes, is the slack regulation over filing substantial security notices. The rules state they should be filed "forthwith", after the transaction takes place. Stock Exchange officials say they would expect that to be within a week. But McEwen says this is not always the case. An AMP Asset Management filing on 16 March this year, for example, covered transactions that took place as early as July 31 2000. Obviously, the later a notice is filed after the transaction date, the less useful it is for small shareholders.

Okay, we're a resourceful bunch at Unlimited. How about checking out insiders' voluntary disclosures - something they can do under stock exchange rules. Any information? Not on your life! A search of all Stock Exchange announcements over the last three months reveal none (yep, zero) dealing with executives' interests. Actually that's not quite true. A dozen or so Australian companies with dual listing had let the NZSE know what their executives had been doing - those silly Aussies must have forgotten they didn't have to.

What about asking your broker? They must have a good handle on what's happening in the market? Probably yes, but whether they will tell a small shareholder is another matter. When Unlimited contacted a few research analysts, most were extremely reluctant to give us even general information about what influential market players were doing. Fund managers were more open, but small shareholders don't tend to consult them about individual stock picks.

Our punt on the insiders

So what can the small shareholder learn from the information we do have about the buying and selling of New Zealand's insiders and big players? Is the dream run we saw on the New Zealand share market, where we outperformed the world for the first few months of the year, over forever? Is everyone pulling out of New Zealand? It's hard to find any explicit evidence of this, says McEwen. Major shareholders have been in two minds about the New Zealand market, judging by transactions this year. Of the 40 substantial security-holders notices, 22 involved increased stakes while 18 showed sales.

Apart from a few major transactions, most of the activities were institutional investors tweaking their portfolios. That's pretty much the picture of what's happening, confirms John Rowley, chief executive of fund manager Challenger International. The market's marking time, Rowley says. "New Zealand equities are going sideways. The big guys have invested already, so we're not going to see major new money coming in. At Challenger we've probably just held our own in terms of New Zealand exposure." The New Zealand market's going to stay "a tad boring" for a bit, he adds. His advice? Buy individual stocks, not markets, for the time being.

Any picks? Telecom would be a good buy under $5 a share, not so good at $6. Rowley reckons number two debt collector RMG is a good buy at present levels (24 cents on 8 May, versus 33 cents just after listing last year) and Burns Philp ($A0.40) in Australia is cheap too. Frucor's been a big disappointment, but if you think it will eventually do well in the UK market, with present levels around $1.90, now could be a good time to buy.

Armstrong Jones investment manager Shane Solly says his company is overweight on Fisher & Paykel, Tower and Fletcher Building, but the company isn't pulling away from this heavy New Zealand weighting just yet. With overseas turmoil, time's on our side. Look for stocks elsewhere, Solly says.

Philip Hunter at Credit Suisse is the only broker that gives us the information we are looking for. His company's major clients are sitting on a lot of cash at the moment. "They haven't been doing a lot of major investing because of the market uncertainty." In the last month, Credit Suisse has been a net investor in funds overseas, Hunter says, driven primarily by the fact that some good stocks are cheap. "My advice is to cautiously invest in good-quality companies at good prices. Probably offshore. The offshore markets have probably bounced back a little ahead of themselves. However longer term there are more growth prospects offshore than onshore."

Nikki Mandow
nikki@unlimited.net.nz

The last four months of trading

Major buys

In April, US company Edison Mission Energy bid for 49 million shares in Contact Energy at between $2.90 and $3.25 - worth up to $160 million.

In January, funds manager Deutsche Australia increased its stake in Baycorp Holdings from 14.7% to 16.9%, for around $25 million.

In March a share feeding frenzy broke out in Christchurch-based electronics manufacturer PDL Holdings. French company Schneider Electric Industries took 18.1% for around $13 million while a group of Asian companies associated with Gold Peak Industries (Holdings) took 8.1%. Schneider has taken exception to Gold Peak's purchases and filed legal action.

Ngai Tahu Investments moved from 50% to 80.5% of Shotover Jet in March after buying a 30.5% stake from Armada Holdings, a company owned by former managing director James Boult. It spent around $6 million.

Major sells

Brierley Investments raised more than $125 million when it sold its 66.1% stake in Tasman Agriculture in April and 48% in Cedenco Foods in May. This is part of a divestment programme of non-core assets.

In April, entrepreneur Craig Heatley sold his 5.5% stake in Independent Newspapers for $63 million. He sold at below the prevailing market price and said he was freeing himself up to travel with his family overseas for a year or so.

Also in April, US giant UtiliCorp sold 13 million shares in UnitedNetwork for around $115 million, saying it wanted to increase liquidity in the company's shares. The sale takes UtiliCorp's stake from 78.8% to 70.2%.

Force Corporation owner and manager Peter Francis sold his 50.1% stake in Sky City in March for $19.4 million. Sky has since launched a full takeover bid for the cinema and property group.

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