Flying Under the Insider Radar at Concentric Network

Executives are buying boatloads of shares at the ISP -- but you wouldn't know it from traditional insider data.
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A major insider-buying move may have slipped under the radar screens of most investors. Beginning back in July and continuing well into September, executives and directors of Concentric Network (CNCX) , the network and Internet service provider, began exercising a combination of options and warrants to acquire 372,455 shares of the company's stock.

That's a lot of shares: more than 1% of the company's public float. But it's easy to overlook, and here's why: Discussions of insider activity -- the kind you're likely to encounter on TV or over the business newswires -- tend to focus on open-market buys and sells and frequently overlook insider exercises of stock options.

It's not that the information is unavailable: Data on insider exercises of stock options and warrants exercises are filed on the same form as open-market purchases and sales. But the data are cumbersome to extract and difficult to manage, which is why most observers ignore option-related activity. But with the explosion in stock-option compensation -- particularly in the technology, telecom and Internet fields -- the key to gauging insider sentiment lies in how those insiders take advantage of their options positions.

Which brings us to Concentric Network. Despite spending much of the past six months retracing its climb to an all-time high, Wall Street analysts have begun warming up to the company. Earlier this month, the company reported a smaller-than-expected third-quarter loss, despite a surprisingly uninspired contribution from the company's major customer,

WebTV

.

Fortunately, impressive gains in digital-subscriber-line services and Web-hosting revenues made up some of the difference. But what really seems to have the Street excited is the company's ability to attract and retain high-profile partners and investors -- a list that includes such heavyweights as

Williams Communications

(WCG) - Get Report

,

SBC Communications

(SBC)

,

Teligent

(TGNT)

and

Microsoft

(MSFT) - Get Report

.

What also impresses us is that Concentric Network insiders, many of whom are seasoned telecom players, have established a pattern of exercising options on stock-price dips. Leading the way, Director Franco Regis (also director of business development and strategic planning for

Telecom Italia

(TI)

) recently exercised warrants to acquire 312,142 shares in a transaction that appears to have eluded most insider analysts. Chairman and CEO Henry Nothhaft exercised options to acquire 24,813 shares, while James Isaacs, a vice president of business development, picked up 10,416 shares. Other executives who exercised options to acquire shares include CFO Michael Anthofer and a senior vice president of sales, William Etheredge.

Two big positives here: First, the options exercised were a combination of ordinary incentive stock options as well as nonqualified stock options. In our experience, the exercise of stock options of any type is a positive, assuming, of course, that the insiders retain all the shares acquired. In the case of nonqualified options, tax consequences favor their exercise when the shares are trading at their lows. This lends an extra significance to the timing of the Concentric insiders' exercise, for, if nothing else, insiders have little incentive to exercise nonqualified options ahead of share-price declines.

Equally impressive, two of the insiders now acquiring shares -- Chairman Nothhaft and Vice President James Isaacs -- sold stock back in May at around 40. Counterintuitive as it may at first appear, we like to see former sellers among those acquiring stock. If nothing else, this helps rule out the notion that they would blindly support their stock, regardless of external circumstances. Particularly useful of course, are those whose past sales have proven timely.

This kind of signal is not guaranteed -- a previous

column highlighting similar activity at

Cypress Semiconductor

(CY) - Get Report

proved prescient, whereas

one that focused on the same kind of circumstance at electronic trading provider

Investment Technology Group

(ITG)

did not.

Still, the situation at Concentric Network looks compelling and certainly worth digging into. After all, despite its still-struggling share price, the stock has some pretty impressive supporters. It's certainly nice to see company insiders prominent among them. After all, when was the last time you heard anything about Internet insiders who were actually

buying

their companies' shares?

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

rgabele@thestreet.com.