Conventional wisdom holds that insider activity must exhibit both "clustering" and "consensus" aspects before it's deemed significant. That is, an investor should wait to see a number of individuals acting in tandem before considering the insider-trading activity to be relevant.
Clearly, there's some truth to this: Many a spectator has been led astray by the actions of a lone executive or insider, however significant, that proved only in hindsight to be a false signal. As with everything, however, there are exceptions, and the case of
Chairman Bernard Schwartz might be one of them.
In the wake of the
Iridium World Communications
meltdown, there are reasons to like the apparent confidence of Schwartz, who keeps upping his stake in Globalstar. You may recall that Iridium recently made news with a dramatic -- if widely expected -- declaration of bankruptcy. Iridium, the first to take the plunge in the global-satellite telephony market, had become something of a bellwether for the group.
To judge from the recent volatility in shares of Globalstar, investors are uncertain how to take the Iridium news. Proponents of Globalstar have gone to great lengths to make clear that the company is no Iridium. And there do appear to be some differences.
Perhaps Iridium's biggest setback -- and that which poses the most realistic threat to the mobile-satellite group as a whole -- was the company's inability to secure access to much-needed capital. Globalstar, on the other hand, recently secured a $500 million credit facility. A credit facility, we should point out, that's guaranteed by
Loral Space & Communications
, another company for which Schwartz serves as chairman and chief executive.
Equally striking, perhaps, is that the $21 per share Schwartz paid in June to acquire a little more than 375,000 shares was considerably higher than the $13 to $14 he paid in March. Schwartz already maintained a 2.6 million-share position in Globalstar. That he bought in the open market instead of exercising his in-the-money options is likewise intriguing.
But none of this means that Globalstar is immune from the challenges that proved to be Iridium's undoing. It's reassuring, however, that the company has such a strong backer. And it's perhaps even more reassuring that this well-placed insider -- intimately familiar with both Globalstar and Loral -- is increasing his personal stake.
Not without risk, certainly. But for investors who are on the fence about this stock, Schwartz's actions might provide a major piece to the puzzle.
On the Effects of Internet Lockups
We've heard a lot of speculation about the pending expiration of yet another round of Internet lockups. This makes for great news, but there are reasons to suspect the results will be less dramatic than some have predicted.
First, at least from what we've seen so far, Internet insiders have reacted to the recent downturn in a manner quite similar to what we've come to expect from insiders at more traditional firms: As many of the share prices have turned south, insider selling in the group has contracted. It doesn't seem likely that Internet insiders are going to indiscriminately dump stock into a weak market immediately upon lockup expiration.
Even in the heyday of Internet insider selling, the expiration of lockups rarely exerted the kind of pressure on share prices that many originally feared. Contrary to popular notions, even when they're faced with all but irresistible valuations, insiders rarely dump large portions of their holdings at the first opportunity.
What's more, with so many of these upstarts already in discussions with larger outfits, the potential for post-lockup windows -- limiting or prohibiting insider activity -- further constrains the number of shares hitting the market. And as a final safety net, Rule 144 sets an upper limit, depending on such factors as shares outstanding and average daily volume, on the number of shares insiders can sell in any 90-day period.
This isn't to say that the bevy of lockup expirations won't add supply to the markets for some of these issues. Given the right circumstances, this could exacerbate the downward pressure. More likely, we suspect, insider selling will continue to be driven by price, with the number of shares offered increasing as the respective stocks recover and decreasing as they pull back. The net effect of this should be to put a lid on any near-term rally in these shares.
Don't expect a disaster, but the days when the likes of an
could soar upon the expiration of its lockup, may well be gone.
Bob Gabele has been tracking and analyzing insider trading since 1978, most recently for First Call/Thomson Financial. This column is not meant as investment advice; it is instead meant to provide insight into the methods of insider trading. At time of publication, Gabele held no position in any of the companies discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabele appreciates your feedback at